new year It’s upon us, and with it comes uncertain and uncomfortable market conditions. With those situations come uncomfortable decisions. For startup founders, deciding which path is right for their business may require rethinking the way they measure success.
The business environment in 2023 will be unusual for many people who founded companies in the last decade. Until now, a seemingly endless amount of relatively cheap capital has been used in the VC world for any startup deemed to have high growth potential. Everyone wants a piece of “the next Facebook.” When interest rates were close to zero, the risks were relatively low and the expected rewards were astronomical.
It became common to burn money in pursuit of growth; When you ran out, you had to collect more money. Debt? Who needs it! Existing investors were happy to play along, even though their stake in the company was somewhat diluted.
Over the years, this fast-rising valuation pattern and the rapidly growing pie to compensate for any dye — fueled by “free money” that justified any investment — became a myth in startup culture. It was a culture that almost everyone, from founders and investors to the media, embraced.
High expectations that make for big headlines send a signal to both potential employees and markets that a company is on the upswing. Valuation quickly became one of the first things new investors looked at when it came time to raise additional capital, whether through private equity funding or an IPO.
The funding path you take has a big impact on your company’s future; It should not be driven by ego or media appetite.
But tough economic conditions make for complacency with hard realities, and this year we’ll see a reality check when it comes to funding. In the midst of rising interest rates and a generally negative macroeconomic outlook, the tap will run slowly — or not at all. Equity financing is no longer cheap and abundant, and when a drought occurs, founders feel anxious. When money is gone, you can no longer burn it without seriously considering where to find more.
When that time comes, founders face a choice that can make or break their business. Will they turn to alternatives like convertible notes or talk to new investors for additional equity funding? Tech stocks have struggled over the past year, meaning their company values have come under significant pressure since their last capital raise, prompting hopes of a “round-down.”
It’s easy to see why low rounds seem out of the question for many startup founders. For starters, they face the positive side of media mania that can erode employee morale and investor confidence. In a culture where rising valuations are worn as a badge of honor, founders may fear that the downturn will make them Silicon Valley pariahs.
Low rounds do not spell the end of your business.
The truth is, there is no one-size-fits-all solution. The funding path you take has huge consequences for your company’s future, and therefore shouldn’t be driven by ego or media appetite.
