Current valuation crisis impact on the future of startups

Various reports suggest that 2025 will likely be another challenging year for startups with a continuing trend of shutdowns that began in 2024. In 2024 more than 900 startups in the U.S. closed, marking a 25.6% increase from the previous year. Piling up private equity dry powder, overvaluation in previous years, and expected corrections in key sectors have combined to create a situation unfavorable for fundraising.

In this challenging environment, founders must adopt strategic measures to protect startup valuations and ensure sustainable growth.

Hence, in this article, we will discuss the trends that threaten startup valuations and how you can differentiate your startup from these trends.

Startup Valuations in 2025: Trends and Factors to Watch

New market realities and evolving investor expectations are reshaping startup valuations in 2025. The focus has moved beyond numbers, with valuations examined more rigorously.

Market Speculation

On account of low interest rates and high market expectations driven by a strong post-COVID-19 recovery and expansive policy measures, we were well past the overvaluation mark in 2021. That year also marked the highest global VC investments in recent history at $702.2 billion.

Due to the rise in micro-cap stocks and the GameStop short squeeze, the market at this point was considered the most speculative ever seen. Additionally, US stocks were at the most expensive levels with an EV/EBITDA of 17x, placing them in the 100th percentile of historical valuation multiples. Moreover, the S&P 500’s Cyclically Adjusted Price-to-Earnings ratio (CAPE) stood at 38.6 in November 2021, the second-highest figure ever recorded. A year after reaching this level, the index dropped by 19.4%.

Thus, the overvaluation in 2021 and the subsequent corrections in stock prices placed any surviving ZIRPicorns and other overvalued startups from 2021 in a treacherous position.

Reality Check for AI Startups

Of the $313.6 billion raised by startups worldwide in 2024, AI startups secured $101 billion. However, concerns are growing over inflated AI startup valuations. Companies such as Perplexity, xAI, and Physical Intelligence are being valued at thousands of times their revenues. AI startups typically attract large investments and high valuations due to the steep costs of training and operating AI models, along with their strong potential for earnings growth.

However, the release of DeepSeek-R1 challenges both assumptions.DeepSeek made the model open source, significantly damaging the revenue generation ability of other generative AI startups and significantly reducing the costs of training new models by enabling others to replicate its training methodologies.

As a result, we may see smaller funding rounds and muted AI startup valuations. This phenomenon might ripple through other related sectors such as cloud computing, data infrastructure, and AI-enabled services.

Decreased Appetite

Presently, we are experiencing two concerning trends in private equity. First, the exit value is down 66% in 2023 when compared to 2021. Second, private equity firms and venture capitalists are sitting on dry powder comfortably North of $2 trillion. Furthermore, according to Pitchbook, in 2025, US VC fundraising will exceed 2024’s $71 billion by $19 billion to $39 billion.

So, we can surmise that the lack of exits has also dried up the appetite for investing in private equity. Thus, in 2025, founders may struggle to attract investors, forcing them to settle for low startup valuations.

While 2025 may turn out to be a challenging year for startups, various stellar corporations had their origins in much more dire circumstances. For example, Airbnb thrived in the aftermath of the Great Recession, while Zoom became indispensable during the remote work boom. These success stories highlight that well-executed, timely business ideas have the power to overcome adversity and achieve greatness.

How can you protect your startup from this trend?

Some measures founders could take to protect startup valuations are as follows:

Hold on until H2 of 2025

Over the last few months, the US Federal Reserve has reduced interest rates by 1%. However, the central bank has stated that it is in no rush to further lower interest rates. When the interest rates are lowered, the ease of access to debt finance will improve. As the reliance on private equity investors reduces, startup valuations would rise.

Another promising development for startups is Donald Trump’s victory in the US elections. Known for his pro-business stance, Trump has advocated for policies aimed at stimulating economic growth. During his campaign, he proposed measures such as corporate tax cuts and tariffs to strengthen the American economy. The exact nature of these policies shall only become clear in the next few months.

Therefore, in the second half of 2025, we can expect two positive developments to occur concurrently.

Hence, if possible, it would be prudent to delay your funding round until the second half of 2025.

Explore venture debt

If you have raised funds through venture capitalists in the past, you could approach banks and financial institutions for venture debt. This is a type of financing that is meant to extend your runway when funds from previous rounds fall short. Typically, venture debt funding is locked at 25% to 35% of the funds raised in the previous round.

In this scenario, the key objective for founders is to secure venture debt as a strategic buffer. This would allow founders to delay fundraising and avoid accepting low startup valuations in an unfavorable market.

Strategically streamline operations

Bessemer Venture Partners, one of America’s oldest venture capital firms, observes that their most successful investments have been in companies led by determined, passionate founders with a strategic mindset. They note that even products that initially seem groundbreaking often evolve so dramatically that not even a vestige of the original concept survives. Therefore, in a funding round, demonstrating the ability to make the right structural decisions can be just as crucial as having an innovative product.

So, heading into a funding round, you must assess which products have long-term potential and which might be a distraction. Such assessments will help you cut costs without foregoing future growth. By cutting down on non-core products, and experimental features, and eliminating or deprioritizing cost-inefficient offerings, you can refocus your team’s efforts on refining high-impact solutions rather than making an array of underperforming initiatives.

Leverage partnerships

If you have achieved product-market fit, your next steps should be enhancing scalability and achieving distribution. These are two areas where partnerships can be instrumental.

Scaling production independently often demands significant capital expenditure, from manufacturing infrastructure to supply chain logistics. Partnering with established companies in your industry can help you scale more rapidly and cost-effectively. Similarly, building a robust distribution network is a time-intensive process. Instead of taking years to establish your own channels, forming partnerships with established distributors, retailers, or e-commerce platforms allows you to leverage their existing reach and relationships. This accelerates market penetration and helps you focus on refining your product and brand.

Furthermore, maintaining good relationships with your partners will enhance your startup’s credibility.

Eqvista – Helping you secure your value!

Startups often encounter several common pitfalls when trying to scale efficiently. Understanding these obstacles can assist entrepreneurs in navigating the complexities of growth more efficiently.

In these uncertain market conditions, Eqvista helps startups stand out. Our defensible valuation reports ensure your true worth is recognized, setting you apart from negative trends and investor skepticism. Partner with us to secure the valuation you deserve. Contact us to know more!