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How early-stage startups can adapt to the new VC landscape

VCs now are much more prudent about their money, but companies can still build the foundations to succeed in the long run.

How early-stage startups can adapt to the new VC landscape
[Photo: Anna Semenchenko/Getty Images; Sharon McCutcheon/Unsplash]

Benchmark’s Bill Gurley tweeted in April 2022, “An entire generation of entrepreneurs and tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run.” With VCs raising larger and larger funds, startup founders had become accustomed to certain key performance indicators (KPIs) set by VCs who were simultaneously providing mammoth funding rounds. The global economic challenges, alongside a volatile stock market, has resulted in a fundamentally new VC marketplace. Business plans, go-to market strategies, and valuations that had all been tailored to certain VC criteria are being forced to rapidly change.

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VCs now are much more prudent about their money, and they are unilaterally shifting the goalposts. They are increasing expected KPIs and milestones while also reducing their investment amounts–causing significant disruption to startups’ plans and ultimately impacting their business decisions and approaches.

This trend of rising KPIs and lower investment rounds is set to continue for some time, resulting in sustained uncertainty and a much harder market for startups to thrive in.

While the situation looks bleak, there are steps companies can take to mitigate the damage and build the foundations to succeed in the long run. Here are several strategies we recommend earlier-stage portfolio companies to adopt.

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Calculate your valuation by looking forward, not backward

In order to avoid running into a financing wall in the near future, calculate your valuation based on where you think you’ll be in a few years’ time, then work backward to figure out your valuation today. This is an important mindshift for founders. It encourages companies to “test” their valuation against other companies in the sector, especially those that are already publicly-traded and therefore adjusting to the market changes to arrive at a more accurate and realistic valuation. It is also a prudent tactic: If your valuation is too high today, you run the risk of an undesirable down round tomorrow. In short, future numbers help “future-proof” your current ones.

Decide what you can give up when raising capital and look beyond the check

When approaching VCs today, it’s critical that you prioritize and be clear about your needs. Like when making any complex decision, it is far easier to decide in advance what you are willing to be flexible about rather than retrospectively changing course. The quality of investor, size of the round, terms or clauses and valuation are all elements to consider when raising capital, but for now founders need to resist the temptation to focus on company valuation. 

The intuitive yet limited approach of starting a negotiation based on valuation in this climate is counterproductive. It’s imperative to limit the challenging clauses to the very minimum, making sure the round size is enough to comfortably fund the company going forward and prioritize working with the right investors. Only then should the valuation come into play.

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Increase efficiency and extend your runway

Rapid growth has been the watchword of tech companies for much of this bull run, but that’s now being replaced by an emphasis on profitability and efficiency. Can you cut unnecessary burn to achieve sustainable revenue faster? How can you demonstrate product-market fit while being capital efficient?

These are questions that board members and investors are increasingly going to ask, and prioritizing the answers while making a conscious effort to drive efficiency is key to providing a company with as much runway as possible and being as attractive as possible to investors.

Raise money, even when you don’t need it

The easiest time to raise money is when you don’t need it, and taking this step and preparing for a variety of eventualities prevents a situation in which founders are trying desperately to raise money at the expense of other pressing company issues.

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Even if you have 12 to 24 months of runway, raise money now if you can. Go to your internal investors and take a hit on your valuation or raise a smaller round if necessary. This also demonstrates that yours is the type of company that can raise money in any kind of financial environment.

Prepare for knock-on effects

Being mindful of all the players in your industry and the challenges that they, too, are facing, sets you up to make sound business decisions in an unpredictable and downturn market. 

This trickle-down effect means that you’ll need to spend more time demonstrating the value of your service to increasingly hard-pressed customers. Do you need to tweak your Go-to-Market approach to cope with the changes? 

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Agility makes all the difference

The good news is many of the best companies actually emerge during market corrections, and those who are savvy today are likely to ultimately reap the rewards for years to come.

It’s reminiscent of an anecdote: A few years ago, the organizers of the Jerusalem Marathon messed up the race’s signage, leading runners to inadvertently add a couple of kilometers going the wrong way. Incredibly, the marathon’s winner was not necessarily the top bet, but a guy who realized the signs were misleading and headed in the right direction.

Was he the fastest runner? No. But he was the most agile.

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You can weather the new investing climate–just make sure you’ve taken the steps to head in the right direction.

Judah Taub is managing partner of Hetz Ventures.

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