Startup fundraising in a changed market
The first thing to say is that the age of easy money is over. Most people in the financial markets and institutions accept that things have changed and continue to change. We’ve been blessed for so long with quantitative easing in the United States and in other countries that many people accepted it had always been that way and would remain so.
When you cut off the supply of low interest and easy money, the capital goes to other places. It looks for a safer haven. The easy money that everyone thought was readily available by just simply investing in real estate or in startups has pretty well disappeared. Innovative tech companies had enjoyed a long and very successful ride, but in 2022 there’s been a flight away from them, too.
Where has the capital gone? It doesn’t just disappear, but it does get redeployed. Right now, it’s being deployed in safer investments and more traditional stocks – the kind of things that weren’t previously “cool” such as energy stocks.
One of the big drivers in these current trends is the question of how "transitory" the current financial landscape is. Can we call it the new normal? There’s a lot of uncertainty. We’ve just come out of Covid-19 and the full results of that may not yet be known. There’s also the war in Ukraine, which is changing daily.
The one thing we can say for sure is that this change is big. I’ve seen a few market corrections and I’d compare this to the .com bust of the late 1990s and early 2000s. It may even be bigger.
Consequences for founders
The big question is: how should founders and CEOs react to this dynamic post-Covid market where investors are looking for safer bets? In the short term, the advice is the same as it ever was – but more so. Cut your spend, control your burn rate, and extend your runway so you can stay alive and live to fight and raise capital from a stronger position. At the same time, don’t try to max out the valuation, if that raises the risk of scaring away or spooking smart money.
Investors now are more cautious. They want to preserve capital and deploy it into investments that make sense for their partners. There’s still money available and there’s still plenty of it, but it’s a new world. There’s less appetite to invest in early-stage startups, which might now look a little like the Los Angeles waiter who has also written a screenplay.
We can be positive and say that this down market is cleaning the system and causing it to reappraise. A good investment prospect is always a good investment prospect. Startups will continue to have access to the capital they need, but the deal terms will be different.
Founders seeking funding may need to consider other jurisdictions. It’s like I always say: if you want to catch fish, go where the fish are. For a long time, that would have been California. One effect of Covid, however, has been the digital dealmaking revolution leveraging video conferencing technology and the idea that you can do business deals with anyone anywhere. The world got smaller.
The amount of capital has increased hugely in Europe over the last ten years. London, Berlin, Stockholm and Paris are some of the obvious sites, but the European (indeed the global) leader of venture capital per capita is now Estonia. Estonia is not the only Baltic nation emerging as a fertile startup ecosystem, Latvia and Lithuania are climbing the ranks. As ever, the Nordics and Switzerland also punch above their weight. It's also becoming more and more common in Europe for angels and VCs to invest across borders.
The first thing to do as a startup seeking more funding is some homework. It’s necessary to put together a team of advisors who understand the challenges and the different pathways to the types of investors that will actively seek to fund ventures like yours. You need a team, a coalition of people with the expertise to take you to the fish, and help you bring them onboard.
That team might include legal minds, salespeople, financial experts and possibly marketing people to help you shape and share your message. Yours is not the only business looking for funding. The advantage is in knowing where to look and how to present your offer.
This is a whole new financial landscape. It’s different to anything we’ve seen before and it’s changing all the time. But some things never change. A good investment is always a good investment. You just have to go after the right investors wherever they may be and show them your business has a solid offer with a solid future with the potential generate a solid return on investment.