After the escalation of the climate crisis after the hottest summer on record and the rapid increase in fuel costs after Russia invaded Ukraine, many start-ups saw their chance ratings are falling.
These global events have been less predictable, while other things like supply chain issues from Covid and Brexit have been known to be influencing the economy for some time.
But what does an unpredictable economy mean for venture capitalists and startups in the future? We asked our expert panel for their top tips for navigating the current downturn.
Our speakers were:
- Sonya Iovieno, Head of Venture & Growth Banking at Silicon Valley Bank UK
- Lucas London, CEO and co-founder of interior design startup Lick
- Harry Briggs, Managing Partner at OMERS Ventures
1/ The coming downturn will continue, but there are still opportunities
All three of our panellists agreed that the looming recession could be felt across Europe for some time to come.
Iovieno named a whole “12 to 15 factors” that have a cooling effect on the continent’s economy. She believes it could take up to two years for markets to recover, which Briggs says would create a “very difficult funding environment” for startups.
However, both VCs insisted that there are many opportunities for startups. Briggs said, “In every downturn there is opportunity to be found.”
“In my opinion it will take at least two years, certainly more than 12 months, to recover from the current environment… [but] that doesn’t mean everything looks negative in this environment” — Sonya Iovieno, Silicon Valley Bank UK
2/ Venture capitalists need to go back to basics
Briggs said the amount of capital VCs are willing to invest is likely to slow, but there will still be activity in the market.
This means that instead of exposing themselves to a broad portfolio of startups (as they have in recent years), VCs will be more likely to look for companies that can clearly demonstrate a sustainable and profitable model.
“The basic principles of venture capital have been forgotten. There will be a flight to quality and some companies will still be able to raise financing at good valuations, but many will have a harder time.” — Harry Briggs, OMERS Ventures
3/ VCs are looking for early-stage investments
Despite their warnings about VCs tightening purses, both Briggs and Iovieno said they believe early-stage startups can raise funds relatively smoothly.
For example, Iovieno reported that accelerator programs are still being used heavily.
Briggs also expects smaller funds to prioritize startups from pre-seed to Series A over the next 24 months. Our panel attributed this to early-stage companies not being burdened with inflated valuations and willing to continue working with passionate and capable founding teams.
“Because these are such early-stage companies, they don’t suffer from the valuation sluggishness that later-stage companies have… There’s still that belief and enthusiasm for really good founders with ideas that are a good fit for the market.” — Iovieno
4/ Startups must chart a path to profitability…
For post-Series A startups, investors will likely want to see that clear path to profitability to consider investing for the next few years.
London said its start-up Lick had experienced rapid short-term growth in recent years but would now focus on other performance indicators as they presented investors with a picture of profitability that could then spur growth later on.
“Our strategy has shifted to a number of things: making sure we’re focused on delivering ROI, and continuing to invest in what will drive mid- and long-term growth” — Lucas London, Lick
5/ …but be transparent on the catwalk
Iovieno said managing the runway should be a high priority for all startups and companies should be as transparent as possible with investors.
Lick is tightening the belt on a few things including: streamlining marketing in its key channels rather than aggressively expanding reach, freezing new hires for the next six months, and reducing spend across operations wherever possible.
London said Lick needs to find the balance between frugality and spending to spur growth.
“[We’re] Look at every aspect of the business to optimize and expand your runway and reduce burn while continuing to invest in growth. I think if we were too drastic with our actions we would get ourselves into trouble raising money in the future” – London
6/ Founders – don’t let rating determine your worth
Of course, some companies have seen their bullish ratings fall. But Briggs warned the founders not to get too attached to a number, which he describes as “an equation of how much your investors are willing to risk against the company’s potential.”
He said some founders may fall too much in love with this character and tie their identity to it. That may put them off announcing a down round, although all three on our panel agreed that sometimes it’s just a pill to swallow.
“Some founders would probably prefer to keep a rating. Partly out of ego maybe, but partly because they don’t want to upset their employees… A down round is painful because you get watered down. At least you know where you stand” – Briggs
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