By Denis Shafranik, Partner at Concentric
It’s an uncertain time for many startups, with venture capital investors more cautious about writing cheques than in the last few years. Startup funding figures show a significant pull back in the last 12 months, and many business founders may be wondering whether they can raise the cash they need, and what the current correction means for their long-term growth plans.
But it isn’t all doom and gloom and there is still funding out there for exciting, innovative businesses operating in attractive markets. Seed stage is holding up better than later stage deals, and certain sectors are proving more resilient. However, there’s no denying that VCs are more risk averse than in 2021 and 2022 and for founders looking to raise, it helps to understand how their perspective and outlook has shifted.
Here are some pointers on what to expect and how to ensure you find the right partner for you and your team:
- Is VC the right option? The first thing to consider is whether VC is the best option for your business at this time. Venture capital is designed for very ambitious businesses that have the potential to scale extremely quickly. Not every founder wants to grow exponentially and not every business has the scope to do so, by the nature of its product, service, or business model. Furthermore, taking external investment means you give up equity, as well as some control of how you run things. If you want to grow at a steadier pace, and on your own terms – particularly given the current economy – there are other funding options, such as a bank or private loan, that may be more appropriate.
- Sector considerations: In the current economy, some sectors are in much higher demand than others, so bear this in mind when seeking out investors. At present there is a lot of focus on complex technologies, for example AI, deep tech, and quantum computing, as well as on B2B sectors, which are in the process of digitising legacy systems and processes. On the other hand, consumer sectors are much more challenging, which means valuations have dropped significantly, and investors reluctant to take the risk. A consumer startup would have to show exceptional resilience and strong profitability to break through those obstacles.
- Re-evaluate your expectations – and your forecasts: Valuations and ticket sizes have dropped in the current market, so you may need to revise your expectations to find the right investors. Over the last few years, rapid growth has been prioritised above all else, but that has now been replaced by the fundamental building blocks of a scalable business, such as product-market fit, and a business model that brings profitability. VCs can spot unrealistic valuations and growth projections a mile off, so instead show you have a good grasp of the fundamentals and the milestones you need to hit to reach a certain trajectory. It is about building trust in the ability of the team to deliver.
- Highlight founder experience: Operating in a more challenging economy, the strength of the founding team is even more important to give investors confidence that they can navigate through the inevitable issues and problems that will come down the line. VCs ideally want to see founding teams with a sector pedigree, technological expertise, strong networks, and/or past entrepreneurial experience. So, when meeting and pitching to VCs, be sure to demonstrate the experience and competencies that make you different.
- Focus on relationships: While cash might be the main motivator for seeking investors, equally important is finding people you can work with and who will bring added value to your business. The right VC partner will bring advice, contacts, and experience that can be hugely beneficial as you grow. Approach those firms where you see a synergy in focus and outlook, getting an introduction from a mutual contact wherever possible. Then spend time meeting and getting to know the team, asking the right questions to understand each firm’s philosophy and approach. Try not to rush it. We always advise businesses to raise funds before they need them wherever possible, so you don’t feel pressurised into saying yes to a deal that isn’t right.
- Be proactive about due diligence: As VCs are more risk averse than in recent years, expect to go through a thorough due diligence process, which will dig into the technical, accounting, and legal aspects of a deal. This isn’t anything to worry about and shouldn’t involve too much work from your side, however founders should be as responsive as possible to requests for information, and fully upfront about any issues or challenges.
Downturns always present a whole host of challenges, but they can also be a fantastic time to build and invest in startups. For our part, VCs benefit from lower valuations and less competition for deals, while the best founders and ideas have an opportunity to stand out and rise to the top. As an entrepreneur, it is also a chance to streamline your operations and focus on what is really important, so that you emerge even stronger and more focused on the other side.