“A rising tide lifts all boats,” as the expression goes. But perhaps more importantly, it also hides any jagged rocks.
In recent years, many of those sharp rocks in the startup ecosystem have been covered by the rising tide of mammoth investment amounts and grossly inflated valuations. With startups’ understandable desire to attract larger rounds of funding and with investors all too willing to open their checkbooks, many companies have secured significant capital without much due diligence into its source. The main concern for a startup was a “yes” or a “no” – not who wrote the check. Because after all, a million dollars is a million dollars, isn’t it?
Now that the tide is rising – and already funding is decliningfounders got a very cold splash in the face.
But sometimes that’s just what you need to wake you up from your sleep.
A tighter investment climate not only means startups are focusing a lot more on the grassroots like streamlined operations and aggressive go-to-market strategies, it also means a lot of the money has dried up from more questionable sources — which might just be a good thing. .
At the end of the day it is is doing important to the long-term success of a company where their investments come from. Board dynamics, future rounds and long-term growth will all be impacted by this decision. Simply put, not all dollars are created equal.
As startups embark on their arduous journey to ensure their businesses can weather both the highs and the ebbs, here are a few “rocks” to consider when raising capital.
the money trail
In the wake of the Russian invasion of Ukraine, a global crisis ensued — and startups and VCs were in no way immune. Those with investors on their dressing table with ties to the Kremlin or those who profited from Putin-linked investments had to rush to adapt. Even major international brands such as Chelsea Football Club were in existential unrest.
The lesson couldn’t be clearer: your source of capital is important. Whoever lets you invest in your idea and product reflects on you. You don’t want partners who are at risk of sanctions or who have questionable moral records.
Companies that have hired non-traditional investors into their space are now finding out the hard way that their lenders are not nearly as well equipped or just not interested in providing substantial support beyond those initial dollars and cents. For example, those who have made investments from a long list of angels with few reserves or, on the other hand, from a multi-billion dollar public fund where their investment represented an insignificant part of their strategy may find it more difficult to rally support in more challenging markets.
The devil is in the details
As cash becomes more important, various cash nuances are likely to become more important as well. Two identical startups with matching revenues and margins may not be viewed in the same way if one is backed by a group of individuals with little industry knowledge, or simply no reserves. Or, if someone is backed by a company that should of course be leading the next round and doesn’t, possibly for reasons unrelated to the company, it could again have a real impact on the way the company operates. company itself is being observed.
It’s not just startups, but also VCs that are now exposing some pockmarks as the funding tide recedes. As with startups, as VCs assess their capital situation, those with a strong base of LPs aligned with their strategy are in a very different position than those who have raised money from opportunistic LPs that are now pulling out.
The bottom line: founders need to recognize that not all dollars come in the same shades of green and act accordingly. Smart founders own their dressing table and not just their capital. Just as entrepreneurs are extraordinarily diligent in coming up with creative products, and when there is a mismatch, they adapt quickly, they must also rise to the challenge of financing with the same level of creativity, equanimity, dedication and determination.
A sensible and considered approach to financing will lead to much smoother sailing regardless of the state of the seas.
Judah Taub is managing partner of Hetz Ventures†