The venture capital landscape has witnessed an unprecedented downturn after 10-12 years of growth. The second quarter of 2022 was marked by the biggest drop — only $120 billion in funding globally, the lowest figure for a single quarter since the beginning of 2021.
Stories about how startups raise $5 million in Seed rounds with only a strong vision and an inspiring idea can be forgotten (at least for now). Investors are becoming more cautious, preferring to fund sustainable projects that will make a difference in the long term.
Being partners at three different investment funds, Seth Pierrepont, Vinny Pujji, and Beth Ferreira have seen this trend begin. At Web Summit, they shared several tips on how startups can attract investment in turbulent times.
Be mindful of financial planning
Wrong financial planning is the key reason why young companies fail. In the past, startups used to be forgiven for a certain wastefulness. Now, however, investors are looking closely at how their portfolio startups manage their money.
“Startups need to treat the capital they receive more responsibly,” says Beth Ferreira, a general partner at FirstMark, an early-stage venture capital firm in New York City.
“Some companies, as soon as they raise investments, start throwing money, for instance, on hiring talents at exorbitant costs,” Ferreira says. “Now is the time for companies to start thinking about how they can accelerate their growth in the most prudent way possible.”
Prepare straightforward business model
It is difficult to assess companies’ prospects at an early stage, which means investors find it hard to predict their future earnings. That’s why, in 2022, VCs prefer startups with a straightforward and understandable business model. And we’ll see the same in 2023.
“(Possible) recession is making it really hard to forecast earnings, that's why investors choose more predictable startups,” says Seth Pierrepont, general partner at ICONIQ Growth, a California-based early- and late-stage fund.
“Cryptocurrency, for example, is interesting but very risky and unstable. Sustainable profit is what the private market cares about now,” he says.
Go beyond technology
Almost any company is technology-based nowadays, but not all are considered pure tech companies. For instance, Amazon is still a retailer, Uber is a ride-sharing service, WeWork is a workspace provider, and Tesla is an automobile company, although they are all technologically transformed.
Founders who try to build tech-only companies make mistakes, thinks Vinny Pujji, managing partner at early growth equity firm Left Lane Capital. “If they actually look at the history of tech-only companies, they will notice how other founders take their technology and turn it into a real business,” he says.
So, according to Pujji, founders should better set a goal to build a real, valuable company that solves people’s problems and makes the world a better place — and tech should be just a tool to achieve that.
Choose the market you know
Don't chase blockchain if you don’t understand it. Don’t create a business in retail because your friends are making good money in this sphere. According to Pierrepont, choosing the market in which to operate a business is one of the biggest decisions an entrepreneur has to make.
“‘Founder market fit’ is essential, especially at the early stage,” says Pierrepont, adding that founders should work in an industry that’s deeply meaningful to them.
Investors pay attention to the way a founder figures out the market. A founder who has operated in a particular industry for more than 10 years and knows all of its ups and downs can predict future trends and even create them. Such a character will always win the competition over a rival with “glowing eyes and attractive storytelling.”
“When founders start a company, they need to understand how the world will look like in a couple of years,” and that’s impossible when they don’t sense the trends in their own field, Pierrepont says.
This column is based on a speech given by Seth Pierrepont (general partner at ICONIQ Growth), Beth Ferreira (managing partner at FirstMark), and Vinny Pujji (managing partner at Left Lane Capital) at the Web Summit conference in Lisbon on Nov. 2.