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How startup revenue growth is slowing across 4 sectors

After years of favorable investments and a macroeconomic environment that led to increasingly higher valuations and faster revenue expansion, VC-backed companies now have to reckon with a double whammy of drastically falling prices and decreasing growth rates.

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Headwinds blowing at startups are intensifying.

After years of favorable investments and a macroeconomic environment that led to increasingly higher valuations and faster revenue expansion, VC-backed companies now have to reckon with a double whammy of drastically falling prices and decreasing growth rates. (Try our new calculator to see just how much those valuations could be affected by the drop in growth rate.)

While some companies continue to grow at a fast clip, accounting data shows that revenue growth declined substantially in 2022 compared to 2021. That data comes from Kruze Consulting, which keeps the books and prepares taxes for over 750 seed through Series C startups.

Kruze used its clients’ financial information to calculate an average slowdown across four sectors: software, ecommerce, healthcare, and fintech, including crypto.

Fintech begins to reverse course

The data, which Kruze shared exclusively with PitchBook, shows that deteriorating economic conditions impacted all sectors, but fintech startups saw the biggest revenue growth reversal.

Healy Jones, vice president of financial strategy at Kruze, said that after growing revenue by more than an eye-popping 500% in 2021, fintech companies started 2022 on a strong note. The rise in interest rates helped credit card companies and other lenders make more money off the additional spread they charged customers, and crypto startups were riding the boom in that vertical. Although Kruze did not break out revenue changes for crypto and blockchain-focused startups from traditional fintech ones, Jones said that about 40% of the consultancy’s clients in the sector are crypto businesses.

While Kruze’s fintech clients grew on average 70% in 2022, toward the end of the year the sector’s revenue began to shrink.

“The November to December drop was 25%. That’s significant,” Jones said. He added that while Kruze has yet to finalize all clients’ January 2023 financials, preliminary analysis shows that the recent fintech revenue decline appears to persist.

While some credit card and B2B fintech companies are still doing relatively well, brokerages, robo advisers, consumer-facing neobanks and especially crypto startups are experiencing significant headwinds, according to Rudy Yang, a senior fintech analyst at PitchBook.

The slowdown in fintech revenue growth is so widespread that it also touched private-market darling Stripe. The payments company grew its gross revenue 27% in 2022—a substantial decline from 60% the year prior, The Information reported.

Ecommerce falls flat

Revenue growth in ecommerce also plummeted in 2022. Kruze clients in this area grew their sales by 84% in 2021, but that group’s revenue ticked up a mere 6% last year.

Jones pointed out that while some of the consultancy’s ecommerce clients are doing well, many are struggling. He said that flat growth is akin to death in the venture capital world: Startups that fail to increase revenue are typically unable to raise additional funding.

The slowdown in ecommerce activity is likely a function of consumer cost consciousness in the light of a possible recession and return to in-person shopping after COVID-19 lockdowns were lifted.

Business cost cuts challenge SaaS

SaaS investors expect their better portfolio companies to triple their revenues in the first two years of operations, and then double their sales in years three, four and five. Kruze data shows that SaaS companies doubled their revenue in 2021.

“That was phenomenal growth, which meant that many companies were on the path” to reach investor revenue targets, Jones said.

But the sector’s sales expansion fell to slightly under 60% in 2022.

Many companies loaded up on SaaS tools when they made a shift to remote work during the pandemic. But now businesses are reining in those costs by canceling underused licenses and applications. In the meantime, the slowdown in traditional SaaS growth is offset slightly by generative AI companies that are starting to show “breakout” revenue growth, according to Jones.

Healthcare’s mixed bag

Healthcare is the only sector not severely affected by the changing economic environment. Kruze’s health-focused clients grew revenue on average by 23% and 22% in 2021 and 2022, respectively.

While healthcare is widely believed to be the most recession-resilient sector, Jones said that a number of Kruze’s direct-to-consumer health businesses saw their revenues shrink or grow poorly in 2022.

Down or out

The slowdown in revenue growth means that companies will take even longer to grow into their pandemic-era valuations. That may be possible for top performers or startups in categories that are holding up better, like SaaS. The challenge is financing a money-losing company in the meantime.

Unless a company has years of runway or market valuations suddenly improve, it’s likely on course for a down round or a shutdown. Given the environment, the former outcome may even be viewed as success.

Featured image by Zuzha/Shutterstock

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    Written by Marina Temkin
    Marina Temkin covered the venture capital ecosystem from 2021 to 2024, based in San Francisco. Previously with Venture Capital Journal, Marina wrote about the VC industry, and she was a reporter with Mergermarket in New York and San Francisco. She also has been a financial analyst and is a CFA charterholder. Marina received an economics degree from the University of California, Davis, and she attended the CUNY Graduate School of Journalism.
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