For the stock market, the new year started with a bounce worthy of farewell, with the S&P 500, NASDAQ and Dow all lower. The dramatic decline ended with a rather shaky initial recovery, but aftershocks still raced to the pedestals of venture capitalists. Indeed, they are in trouble, which ultimately begs the question – will startups leave 2022 empty-handed? Is there a headwind outside?
Well, you don’t have to. It is still too early to draw far-reaching conclusions regarding the state of the union in the world of venture capital, which is already blazing in 2021. Startups have raised $643 billion worldwide, nearly double what they were in 2021. Each A week, the world brought in an average of 10 unicorns. The past year also saw a record number of releases, and this is where the story gets a little less rosy.
Nearly 400 companies offered their shares to the public, raising nearly $142 billion. But when venture capitalists hit the open market, things didn’t go as planned. Even a quick look at the top 10 companies on Crunchbase’s IPO list for 2021 is enough to see that the general market has not been kind to many tech startups. While the companies were initially successful, success was often short-lived and the path forward was in many cases ups and downs or decisive downturns.
It is true that no one should expect venture capital firms to be expert priests, pointing to successes in the general market. Its business is risky, and its expertise brings companies to market and helps them expand rapidly. However, these IPOs leave venture capitalists with some unanswered questions, as others can – and will – include them in their accounts. Will venture capital be able to raise funds efficiently? Is it time for more conservative investments? Should Startup Founders Stop Venture Capital Advertising Horses Right Now?
Raising venture capital in today’s market requires a “new old” playbook.
We’re not in a moment of ups or downs – a good founder always raises money, so there’s no need to bring all of Shakespeare here. But it would make sense for potential entrepreneurs to adapt their strategies to the current market situation.
Distinguish your company from the competition
The first thing, more important than ever, is making your company stand out in your message. For example, let’s say you’re going to market a brand new social media platform where people can connect with their friends, share their photos, build communities, and more. In other words, Facebook really is, and when you approach potential investors, you’ll likely cite Facebook as an example of how much traction your venture can generate.
Well, here’s the bad news: As of this writing, Meta stock is completely down year-to-date, down more than 27% since last April, and the platform is slowly shedding users. One of the things you need to convey to potential investors is that you are not quite like Facebook. Explain what your platform has to offer young people, the demographic that Facebook is struggling with, and all the market research on which your claim is based. Explain why investors aren’t worried about the possibility of a Senate hearing with a whistleblower from your company. Expect such questions from venture capitalists. Show them how different you are.
The right timing is the key
Another major thing founders need to correct is timing. Investors are always looking for a company that is about to launch. In a year of financial uncertainty and turmoil, it is doubly important for them to get the most out of their money as soon as possible. It gives the impression that your startup needs a project to secure external support.
Admittedly, this is partly due to the visual control, but more to the timing. In the current environment, it makes sense to wait for the VC release to start picking up steam. Will your team close the first sale? Come on! Are there at least three companies already using your platform, including at least one that you would like to recommend? Even better! Is the idea still in its infancy while you and your partner work on measuring the needs of potential users? This is far from ideal.
Do your homework
Founders also have to do their homework when talking to investors. Recently a colleague of mine saw a potential investor step in at the last minute and the job was at stake. If my friend spoke to one of his colleagues about what it means to be an investment partner, he would know that this is not the first time.
At the heart of their argument was uncertainty about what happened next: while my colleague was hoping to raise money from a few more angel investors, the potential partner had other ideas. And this is another important lesson for founders to learn: they need to fully understand what happens after the terms are signed. Investors are not just portfolios, they are partners. The person you shake hands with can make or break your project.
Development of valuable products
Finally, one thing that never changes is the focus on delivering value to the customer. Products that do their job tend to work over the long term and are less subject to market volatility. Companies making such products will still have an easier time in 2022 than they did in 2020, as the pandemic has encouraged more companies to adopt early technologies and is helping start-ups to bridge the so-called “gap”.
Judging by the current state of the world, the factors that will accelerate venture capital investments in 2021 are still there. From worries about new variants of the virus to a clear reluctance from workers to return to the office, the paradigm shift caused by the pandemic has not yet left the world. In other words, companies continue to encourage innovation, so investors provide a friendly audience for new products and services that smart startups have to offer.
Financing venture investments: a look into the future
While a market correction could dampen venture capital markets somewhat, the fundamental winds that filled their sails last year continue to bounce in leaps and bounds. Innovation is in demand, and venture capital funds will soon be inundated with companies that can add real value.