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How to handle those hard valuation conversations

Illustration of dollar bills on a roller coaster track.

Illustration: Shoshana Gordon/Axios

Climate-tech investors are having difficult conversations with startups about repricing valuations down from the top of the market in 2021.

Why it matters: The valuations for climate tech, along with broader tech startups, were sky-high two years ago, but the reality of more expensive capital, higher interest rates and challenged public markets has now set in.

What they're saying: According to a conversation with a group of climate-tech investors at the SOSV Climate Tech Summit that will be aired Tuesday afternoon, investors are wading into these tricky valuation conversations.

  • "Probably 50-ish percent of the companies that are B and C rounds out there, who have viable businesses, they're actually good functioning companies, they were just completely mis-priced at the last round, and that's where you're going to have some tough conversations," said Fifth Wall's Greg Smithies.
  • "For those who priced high, it actually feels quite a healthy thing to be resetting valuations to a place that feels much more realistic to build a resilient, steady company," said S2G Ventures' Kate Danaher.

Zoom in: Smithies warns portfolio companies to avoid doing skinny valuation resets, or what he calls "Diet Coke" rounds.

  • His advice is that if a startup is going to reset its valuation, don't do a small bridge round and then hope you can grow to the valuation. "A small bridge round is just a bridge to nowhere."
  • Instead, you should go "heavy-handed" and "push down the valuation as far as possible and reset yourself into this new reality," says Smithies.
  • The world is never going back to 20 times forward revenue and 0% interest rates, says Smithies.

Yes, but: Investors can have contrasting interests to founders that might want to maintain a certain level of valuation.

What's next: Tune into the entire conversation that touches on the benefits of raising funds from category-specific climate investors and the hottest areas of ocean tech, building tech and ag tech.

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