Recent commentary from startup investors and pundits makes for grim reading, especially if you are an entrepreneur starting now
That said, given the benefits of the technological leaps that startups have enabled and the value they have helped unlock, the startup ecosystem has gathered critical momentum in the last few years
If you’re a startup looking to raise capital, here are four themes to keep in mind
Recent commentary from startup investors and pundits makes for grim reading, especially if you are an entrepreneur starting now. Global venture capital investment data from CB Insights reveals a sharp fall of 23% between the first and second quarters of the year so far.
Sequoia Capital cites the macroeconomic environment, geopolitical tensions, and turbulent financial markets to warn their portfolio companies about the impending downturn. Furthermore, Y Combinator has issued a 10-point advisory about raising and managing funds in light of the unfolding global economic situation.
That said, given the benefits of the technological leaps that startups have enabled and the value they have helped unlock, the startup ecosystem has gathered critical momentum in the last few years. So, while the investment juggernaut will likely slow down, it is unlikely to stop completely. If you’re a startup looking to raise capital, here are some themes to keep in mind:
Scalability Of The Market Opportunity And Why Now
A significant market opportunity and the ability of a startup to capture a sizeable portion of the addressable market form the basis of most business plans. However, in the new landscape characterised by inflation and possible recession, investors are also interested in the scalability of the opportunity and the agility with which the company can synchronise the two.
Another direct impact of the current economic climate is a restricted flow of money and a more conservative approach to startup investing. As a result, investors will be more selective about their investments and are more likely to think immediate term. Thus, founders must be able to highlight the relevance or urgency of their business in the current market.
For instance, remote working during the lockdown had an adverse impact on regulatory visits and approvals for manufacturing plants in the pharma sector. This gave rise to several use cases for deploying digital twins and interactive tools for virtual inspections. And while physical site visits have resumed now, it is an opportunity that is relevant now and also has tremendous future potential.
Demonstrable Early-Stage Positive Traction
Not so long ago, merely the idea of a unique offering pitched by a founder-only team could raise more capital than needed without breaking a sweat. The market conditions allowed investors to provide a longer runway to their portfolio companies, both in terms of finance and time to bring the idea to fruition. Unfortunately, that is no longer the case. Shorter money cycles and business cycles need faster go-to-market and more efficient monetisation models.
So, in addition to the future potential of an idea, investors are likely to favour companies that have garnered early traction. The definition of traction would be unique to each company, but broadly it needs to indicate a positive forward momentum. Depending on your unique case, it could be a product in the beta stage or a pilot, or it could be the strength of the business model validated by a grant, an accelerator, or a renowned institution or authority in the domain.
Understanding Potential Risks And Preparedness
Risks also come in a variety of shapes and forms. It could be something as direct as competing solutions, a weak link in the value chain, or something more complex like potential legal or regulatory pitfalls. In the digital age, proximity to technology platforms opens the roster of data and privacy risks that founders need to consider.
Besides being significant factors themselves, a combination of these risks increases the overall liability exposure exponentially. So, investors are now taking a keen interest in understanding how risk-aware and prepared the founders are. A startup’s approach to mitigating the risks is a crucial cog in the wheel, and failure to address this could be the difference between signing the dotted line or not.
Flexibility And Openness In Terms Of Investment
There are multiple moving parts when it comes to terms of investments between investors and founders, and it goes beyond just money. Moreover, these factors vary based on where a startup is in its lifecycle and the investor’s motivation.
Many successful business executives or serial entrepreneurs who invest in very early-stage startups may want to get in early to play an active role as a mentor or an enabler by helping make connections. So, besides the shareholding, founders may need to weigh in on how much or how little control they are willing to share with potential investors in the form of shareholding within the company.
These are just a few aspects of the multi-faceted phenomenon that startup funding is, and as the external landscape evolves, so do each of these facets. One way to respond to such a dynamic situation is by thinking creatively — not only while designing your product but also when raising money.
So, a bit of flexibility and openness in the terms of investment and ensuring transparent and two-way communication from the very start can go a long way in building a mutually beneficial relationship based on trust between investors and founders.
