Are We Repeating The Mistakes Of The Last Bubble?

In December 2021, I highlighted the dangers of tech startups raising capital at inflated revenue multiples between 40x and 70x. At the time, it was clear that valuations were being driven more by hype than by financial fundamentals.

The warning signs were there. Now, years later, the consequences are materializing.

Many of those companies raised at sky-high valuations without ever achieving profitability. As cash reserves dry up, they are facing a harsh reality. Market multiples have contracted significantly, and those inflated valuations from 2021 are now a liability.

The consequences of inflated valuations

• Burning cash without a safety net: Companies that raised during the 2021 frenzy often expected follow-on funding at similar or higher valuations. But when that capital never came, they were left with aggressive burn rates and unsustainable cost structures. Many are now out of cash and scrambling to sell, often for a fraction of what they once claimed they were worth.
• Fire sales are replacing funding rounds: I now meet founders regularly who are exploring M&A not as a strategic exit, but as a last resort. These are not healthy companies looking to grow through partnerships. These are distressed startups trying to recoup whatever value remains. The market has corrected, but their cap tables haven’t. The result is a mismatch between seller expectations and what buyers are willing to pay.
• Unit economics were ignored for growth: In the rush to grow fast and raise bigger rounds, many companies neglected the unit economics basics. Gross margin, CAC payback, dollar retention and profitability were sidelined in favor of valuations and top-line revenue. Now that the market is focused on sustainable growth, companies with weak unit economics are struggling to survive.

The AI wave is showing the same patterns

What worries me is that we are seeing the same dynamic play out today in the AI sector.

Early-stage companies are raising at valuations that assume future dominance, long before product-market fit or revenue. The technology is exciting and the potential is real, but history tells us that not all companies will emerge winners.

When the hype settles, those with sound business models and disciplined financials will remain standing. Others will be left dealing with down rounds, layoffs or worse.

What founders should focus on now

• Raise at a valuation that reflects your business, not the market trend: A modest, well-structured round sets you up for sustainable growth and realistic expectations in future financings. Chasing the highest number on your term sheet may feel good in the short term but often leads to long-term challenges.
• Plan for profitability, not perpetual fundraising: The best companies today are those that have built paths to breakeven. Founders should be laser-focused on extending runway, improving efficiency and demonstrating clear financial discipline.
• Avoid relying on momentum to carry you forward: Momentum helped companies raise easily in 2021. But when market sentiment shifts, only the fundamentals matter. Those who focus on building strong products with clear value and repeatable sales will be in the best position to raise, grow or exit at an attractive valuation.

Itay Sagie is a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. Learn more about his advisory services, lectures and courses at SagieCapital.com. Connect with him on LinkedIn for further insights and discussions.

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Illustration: Dom Guzman