There seems to be an online competition going on to give founders the most pessimistic advice. A quick scroll on LinkedIn or Twitter will make even the most optimistic CEOs shut down their companies and run for the hills. This kind of blatant talk of mischief might be good for views and likes, but it’s bullshit.
To begin with, the venture capital market cannot be viewed as a homogeneous mass. The advice given to founders raising a Series C round should be completely different from the advice given to founders raising a Seed or Series A round. Yet online commentary rarely makes that significant difference and falls into overly negative, unhelpful generalizations.
It is also not the first time that we have experienced a recession. Many founders and investors would not have survived the dotcom bubble or the global financial crisis. For those who have, the current conditions are familiar and not unprecedented. Like all bleak economic times, there are challenges and risks, but also opportunities.
For founders in the early stages of building a venture-backed startup — that is, before they create and get involved with a Series A — there are reasons to be cautiously optimistic.
the seeds are round
Much of the commentary around the overall health of the venture capital funding market looks at shorter time frames. The headlines announce that there will be less venture capital in 2022 than in 2021. There are good reasons not to dig too deep.
First, early stage funding has been the least affected and still stands at $34 billion globally in Q3 2022. A 25% quarter-on-quarter and 39% year-on-year decline from 2021 is a meaningless comparison. Venture finance could not keep up with the rapid growth and it was only a matter of time before a reform took place. In addition, and just to make it clear, there are billions of dollars Even then Going to start-up companies around the world – the supply of capital will naturally ebb and flow.
Second, looking at venture capital funding in the UK since 2013, the long-term trend is upwards, with an anomaly in 2021. Compared to all years before 2022 through 2021, funding numbers are still relatively healthy. And this is understandable. As an investor in the (pre-)seed phase, exits are so many years away that the prevailing macroeconomic conditions have relatively little influence on decision-making.
The danger for founders is creating expectations assuming 2021 was a normal year and the need to raise is still the same. This one Is Pickup has become more difficult due to lower capital (versus 2021) and recalibrated risk appetite, but founders are still closing seed rounds. The market has changed but remains open.
Series A Funds Active
For Series A funds, 2021 has been a challenging time. Valuations skyrocketed and the fundraising process moved at an incredible pace, challenging due diligence and strong decision-making. For many funds without a premium brand, it was difficult to access the best companies. In 2022 it has become normal.
Looking back at 2021, Series A funding will be least affected in 2022 – down just 23% year-over-year. This reflects the fact that many strong companies were raising funds and were constantly hungry to invest in them.
The recalibration in Series A affects the founders in a number of ways.
Notably, valuations have fallen from their 2021 highs. A heavy run on higher valuations in 2021 now looks bleak at best or worst. They also cause headaches for founders who struggle to grow them and increase their next rounds on favorable terms. Today it may seem negative to give your company more money for less money than it did last year, but to raise a reasonable amount at a reasonable price you had to make sensible dilution before the boom and into the future. Will continue to work in the future.
The type of fund in the Series A market is also evolving. Multi-stage funds are cautious, busy grooming their later-stage portfolio companies, some dipping their toes in the water with seed checks to stay active and relevant (and help LPs justify their management fees). We do). The podium specialists are enjoying their moment in the sun – they have been able to seize the opportunities that could have been presented to them in 2021. Processes have gotten longer and take more time than before as funds dive deeper into every opportunity, eager to avoid every downfall. optimal decision making. This is painstaking for the founders, but results in more lasting early relationships with investors.
Series A expectations have also been reset to pre-2021 levels. Gone are the days of preemptive rounds where companies only had a few hundred dollars in revenue. The metrics founders need to have a realistic shot at a Series A funding round are fluid, but the now-famous SaaS Funding Napkin is a helpful guide.
Low valuations, long process and more rigidity around key metrics don’t seem to be excellent News to the founders, but they represent a long overdue return to reality. They also no Means the market is closed. Like seed (and pre-seed), funding levels in Series A remain strong against historical norms and many founders consistently close rounds.
Time works in your favor
Early-stage founders will be looking for growth funding in a few years — beyond Series B. Growth times are tough today, and no one knows when the current cycle will turn. However, in two or three years we will likely see a return to declining public markets with greater capital and risk appetite. Nothing is guaranteed, but founders who started or started their journey early are now in a much better position than those who unfortunately ended up in the eye of the storm.
Founders who read advice to downsize their workforce, drastically cut marketing budgets, strive to “survive by default” or close their business should think carefully about whether this advice is relevant and proportionate. In these challenging times, many commentators are using worst-case scenarios to generate clicks, or extrapolating their personal experiences to speculate on the entire venture capital market.
Being a founder of an early stage company has always been difficult. It is more difficult in 2022 than in 2021, but not materially more difficult than in recent decades. The right approach is cautious optimism, shutting out the noise, seeking advice from a small number of people you trust, and not letting fear control your actions.