As the world moves into economic headwinds and geopolitical uncertainty, European founders must practice taking tough decisions to ensure the survival of their startups. This includes experiencing a ‘flat’ or ‘bottom’ of funding after experiencing high valuations over the past two years.
That was the message from Niklas Zenström, co-founder of Skype, CEO of Atomico and one of Europe’s leading tech players, at the Slush conference in Helsinki today.
Zenström gave a candid assessment of the economic environment in keynote speeches, explaining how he has often failed in his own career in difficult economic conditions.
Speaking about how he had to liquidate two of his own businesses before Skype, he said today’s entrepreneurs now have to focus on the long-term success and survival of their companies, rather than ‘the good times of the bull market and the high valuations of the past, and that means tough choices.
Zennström said that despite the bad reputation of low positions (a financing in which a company sells shares of its capital stock at a price lower than the price of the shares previously sold in financing) or flat rounds (financing). A round in which a startup issues shares at a post-funding price similar to the fundraising period, meaning the company’s value has declined) that startup founders may accept as a price to keep their company. Live for a long time.
“There is stigma. We have turned the tide for the worse. Shame about what it says about our business, that it’s worth less than it was a year ago.
Data from Pitchbook indicated an increase in minimum rounds in Q3 of this year, with 19% of all European VC funds now meeting this criteria. This is up from 12% in Q2, and the trend will continue into Q4.
But Slush challenged the audience to think differently about down rounds and not take it so personally: “First, ‘down rounds’ are just a function of the broader market. That is the reality we are facing now. People aren’t willing to pay what they were a year ago for tech company stocks. In Q3, technology investment increased. In the same period in 2021, it decreased by 30%. In Series A, pre-money prices are down 50 percent from their highs earlier this year. A low estimate in this area will not reflect on you. It’s market volatility.”
He added that startup founders currently in fundraising mode should pick up immediately: “The biggest issue with rounds is that people leave them too late. It is easy to hope that the market will improve. I’ve seen founders tempted to stop raising expectations to change things. For a pre-profit company, this means eating into the runway of the future. And the smaller the business, the more the company is exposed to risk.
Option after 6 months “Rescue financing is full of stressful choices and exit clauses. Don’t let that be you,” he said.
Ultimately, down and flat rounds are “really about growth. Raising money strategically, before the point of no return, can prove a masterstroke. Any founder who has the guts to raise money early can, frankly, continue to scale at a time when others are downsizing and losing talent. This may be the single best time to hire great people away from the competition. Whether the market changed in one or three years, these companies would not stand still.
Reflecting on his own experience as a founder, Zenström says he founded and folded two companies before Skype, which was painful, but “it wasn’t really as big of a deal as I thought it would be.” My team had a great experience and got amazing new jobs. And I brought the best people to the next idea. The only thing that was broken was my dreams… and maybe my ego. But once it was over, I got the chance to start again. I was more motivated to prove that I could build a successful company.
“I started Kazan in 2000 and a few years later I started Skype – just after the stocks crashed 80% in the dotcom boom,” he says, ending on a positive note. And at first I thought – wow, I’ve missed the boat!… but something funny happened. We managed to find a way. As our bank balance dwindles, we become more frugal and frugal. I have found that stronger and more sustainable companies come from failure. And based on what I saw then and what I’m experiencing now, I’ve never been more excited about what Europe is building…”
Following the talk, I asked Zenström if he thought it was self-serving to set a reflective vision for the VC eclipse. He said: “Atomico didn’t lead many down, so this is about my personal experience as an entrepreneur and seeing talented founders struggle years after Atomico’s initial investment. When a down round comes later, we are in the same boat as the founder – we both experience no value reduction.
The data doesn’t suggest this funding environment is going away anytime soon, and the current set of companies will face even lower rounds, “The challenge is to fend off a combination of misplaced embarrassment and blind hope that the situation will change.” From the founders. That means these founders will stop building, and technology will stop developing. If we don’t kill isolation, this could stop some amazing technologies in their tracks. That is very wrong when Europe has such a wonderful tool for success in the long run.
Next month, Atomico will publish its annual European Technical State 2022.