Benchmark’s Bill Gurley tweeted in April 2022, “An entire generation of technology entrepreneurs and investors developed their full perspectives on valuation during the second half of an incredible 13-year bull run.” With venture capitalists raising ever larger funds, startup founders had grown accustomed to certain key performance indicators (KPIs) set by venture capitalists simultaneously providing gargantuan funding rounds. Global economic challenges coupled with a volatile stock market have resulted in a fundamentally new venture capital market. Business plans, marketing strategies and valuations that had been tailored to certain venture capital criteria are being forced to change rapidly.
Venture capitalists are now much more prudent with their money and are unilaterally changing the goalposts. They are increasing expected KPIs and milestones while reducing their investment amounts, causing significant disruption to startups’ plans and ultimately affecting their business decisions and approaches.
This trend of rising KPIs and lower investment rounds will continue for some time, resulting in sustained uncertainty and a much harder market for startups to thrive.
While the situation looks bleak, there are steps companies can take to mitigate the damage and lay the groundwork for long-term success. Here are several strategies we recommend early-stage portfolio companies adopt.
Calculate your valuation looking forward, not backward
To avoid running into a funding wall in the near future, estimate your valuation based on where you think you’ll be a few years from now, then work backwards to estimate your current valuation. This is a major mindset shift for founders. It encourages companies to “test” their valuation against other companies in the sector, especially those that are already publicly traded and therefore adjust to market changes to arrive at a more accurate and realistic valuation. It’s also a prudent tactic: if your valuation is too high today, you risk an unwelcome bear run tomorrow. In short, future numbers help “future-proof” current ones.
Decide what you can give up when you raise capital and look beyond the check
When approaching venture capitalists today, it’s critical that you set priorities and be clear about your needs. Just like when making a complex decision, it’s much easier to decide in advance what you’re willing to be flexible on rather than change course retrospectively. The quality of the investor, the size of the round, the terms or clauses and the valuation are elements to consider when raising capital, but for now the founders must resist the temptation to focus on the valuation of the company.
The intuitive but limited approach of starting a valuation-based negotiation in this climate is self-defeating. It is imperative to limit challenging clauses to a minimum, ensuring that the round size is sufficient to comfortably finance the company in the future and prioritizing working with the right investors. Only then should valuation come into play.
Increase efficiency and expand your runway
Rapid growth has been the watchword for tech companies for much of this bull run, but it is now being replaced by an emphasis on profitability and efficiency. Can you reduce unnecessary burning to achieve sustainable income faster? How can you demonstrate the product’s market fit and at the same time be capital efficient?
These are questions board members and investors will increasingly be asking, and prioritizing answers while making a conscious effort to drive efficiencies is key to providing a company with as much runway as possible and being as attractive as possible to it. the investors.
Raise money, even when you don’t need it
The easiest time to raise money is when you don’t need it, and taking this step and preparing for a variety of eventualities avoids a situation where the founders are desperately trying to raise money at the expense of other pressing company issues.
Even if you have 12-24 months of experience, raise money now if you can. Reach out to your inside investors and take a hit on your valuation or raise a smaller round if needed. This also shows that yours is the type of company that can raise money in any type of financial environment.
Prepare for side effects
Considering all the players in your industry and the challenges they too face prepares you to make sound business decisions in an unpredictable and downturned market.
This trickle-down effect means you’ll need to spend more time demonstrating the value of your service to increasingly hard-pressed customers. Do you need to modify your marketing approach to cope with the changes?
Agility makes the difference
The good news is that many of the best companies emerge during market corrections, and those that are smart today are likely to reap the rewards for years to come.
He recalls an anecdote: A few years ago, the organizers of the Jerusalem Marathon messed up the race signage, leading runners to inadvertently add a couple of kilometers by going in the wrong direction. Incredibly, the winner of the marathon wasn’t necessarily the highest stake, but a guy who realized the signs were misleading and headed in the right direction.
Was he the fastest runner? No. But he was the most agile.
You can weather the new investment climate, just make sure you’ve taken the necessary steps to head in the right direction.
Judah Taub is managing partner of Hetz Enterprises.