It’s turbulent times for startups raising capital right now and Sie Ventures is even more committed supporting founders navigating their way through it.
Last week we hosted a session in partnership with Silicon Valley Bank discussing the current funding landscape and how the economy and public markets are impacting the venture capital market.
We heard from our insightful panel Emma Phillips, Investment Partner at LocalGlobe, Juliet Bailin, Principal at General Catalyst, Krishna Visvanathan, Co-Founder of Crane Venture Partners and Glen Waters, Head of Early Stage Practice, EMEA at Silicon Valley Bank.
Public Markets impact on Venture Capital, early vs growth stage
Glen Waters from Silicon Valley Bank opened up the discussion by sharing insights on how public markets have affected exit prices.
“Inflation in the UK, Europe and the US is circ. 9% which is the highest level for 40 years and central banks are responding by raising interest rates. This is bad news for stock markets which tend to move in the opposite direction to interest rates and particularly growth companies whose earnings and revenues get discounted by a higher interest rate to a lower number today, even if they are hitting their targets. Liquidity has left the venture ecosystem — this has been particularly driven by cross over funds that have deployed fast and bigger checks, their pace of deployment has slowed down, particularly Series A and Series B investments.”
Despite many funds rethinking their deployment strategy, Emma from Localglobe and Krishna from Crane VC both shared that they are still deploying at the same pace as before in pre-seed and seed. They are taking a long term view, meaning they must believe in the market opportunity, and founders as well as the business model they are executing have to be strong.
Glen added that while multiple family offices have stopped deploying, impacting many funds, there are funds out there who most definitely have the money to invest e.g. EIS and VCT funds in the UK who need to use the funding raised in a year. £1.2bn was raised in VCT investment in the year to April 22.
“Furthermore, VCs are more biased towards strong unit economics, and capital efficiency both in the US and Europe but good businesses are still getting funded.”
Juliet from General Catalyst agreed that the bar is definitely higher but not at the expense of ambition, and they are still investing for a 5–10+ years outlook. She also added that whilst Europe is slightly behind the US, things are accelerating faster in Europe and we should not underestimate the current climate.
Krishna who has 23 years of experience in Venture Capital compares 2020 landscape with the market today and says funds perhaps paused for a quarter during the pandemic but most funds started to deploy very soon again. By 2021 most funds were back to investing. Back in 2001/2 things were very different — the majority of funds went into pause mode for 12–18 months resulting in far fewer new investments. Raising back at the time for funds was similarly challenging since LPs were hugely impacted. He adds that we are not quite there yet but expects things to get tougher over the next 4–6 quarters and recommends founders prepare for it. Whilst capital is hard to come by, good businesses are getting funded but need to adopt to lower valuations.
Glen adds that many VCs and LPs are awaiting for clarity — we have disrupted supply chains, labour shortages and geopolitical tensions, there is a lot of uncertainty out there. Investors hate uncertainty which slows down later stage deals, together with a further compression of valuations. Early stage investments have less correlation with public markets with smaller checks, therefore less affected.
Impact on valuations and investors expectations
Valuations is and will be the topic for the next 6–12 months, yet working out valuations is an art, not science, and there are benchmarks out there. Emma sheds some light on the market norms — pre-seed valuations are sub £5M post-money, and seed sub £20M post-money, yet these are all depending on the market, team, technology and the product. The maths investors are doing is based on two years of runway to deliver on the inflection points the founders need to hit by their next funding round. It is also important to consider that founders are not massively diluted in the following rounds. What founders often do not take into consideration by raising at very high valuations is that they take the first and bigger hit if there is going to be a down round, investors will be impacted but less. Juliet confirms:
“It is also healthier for the founders to raise at more reasonable valuations because long term they do not take such a big hit if they cannot deliver on their metrics. Eventually building companies that will be around for a long time. The upside for investors is that they no longer have to try and win a deal in 24 hours but can take time to get to know founders and show how they can add value. It is also a good time for founders to get to know their investors, not playing the FOMO games, and making sure they get the right backers on board. This is good Venture Capital.”
We also discussed investors investing in tranches based on milestones met in current climate. Juliet suggested it can be acceptable if investor is an expert in a particular space and can help you to reach these milestones but overall this is a fairly risk averse way to invest.
Krishna adds that if the investor is proposing a tranched structure it most likely means there is too much risks involved for them, thus tranching as a means to mitigate it. You should always take a step back and think through if you can deliver the results to receive the next tranche.
Are there any recession resistant industries?
It is hard to generalise but there are some sectors that are not as much affected by market downturn. Glen suggests sectors such as cybersecurity, software infrastructure, fintech with robust business models as well as climate tech might be less impacted. On the other hand, D2C is likely to take a bigger hit due to discretionary spending going down.
Juliet adds their investment thesis is constantly changing but what they always look at is market timing. For instance, the supply chain is something investors are still bullish about but what is currently happening with energy prices combined with the Russia/Ukraine conflict, impacts investors’ thinking. Companies that are more “nice to have”, rather than “must have” are the ones to suffer the most.
Emma however pointed out that when people come out of recession the spending is higher and some of the most successful D2C companies were built during or after the last recession. If your business fits into this discretionary spending bucket you need to have deeply thought about your go to market and retention strategy and to focus on this when pitching.
Conclusion here is to speak to as many different investors as possible because everyone has their own opinion and thesis.
How to navigate raising capital in recession
We have heard a lot about investors having slightly higher thresholds for metrics and revenues in the current market, more demand for the proof of validation. According to Krishna if you are a post-revenue company, you should assume that investors would expect to see more progress digging into the quality of your revenue metrics, unit economics, churn, engagement rates, ability to scale and longevity of the customers you have signed. It is more about the quality of your metrics. For pre-revenue companies, investors are focused on the opportunity — how are you thinking about the fundamentals of what a scalable company looks like? Have you thought through the challenges on how you take the product to market? Do you understand the gaps in your team? What level of resources are required? etc. In other words, identify the areas where the company might be struggling to hit the following milestones for the next funding round.
Finally, we asked our panel to give their recommendations to founders who are raising or planning to raise during a market downturn.
- “Take the money if you are offered capital on acceptable terms because fundraising is not getting any easier.” Glen Waters
- “Ask lots of questions and speak to many different investors. Keep what is the most authentic and relevant for your business and find the investors who are the most aligned. Talk to other founders and extend your runway as long as possible.” Juliet Bailin
- “Do not get discouraged or distracted by market noise. Plan, do not panic and definitely, do not read too much Twitter.” Emma Phillips
- “Go back to basics and focus on the value created for customers. Thinking through what makes a strong company and what is right for the team. Do not focus on what investors want and think, but work on what you can control in your business.” Krishna Visvanathan
That’s a wrap for this time, we hope you took away some encouraging advice to keep on building your business despite challenging market outlooks.
If you are a female co-founded company raising capital in Q4 2022 or Q1 2023 we encourage you to apply to the Sie Catalyst program. During three months you will have the opportunity to work and meet with some of the best Venture Capitalists and Angel investors in Europe.
