Rising interest rates combined with increasing costs and a post-pandemic economy have challenged all businesses – often in new or unexpected ways. As investors become more cautious during these uncertain times, what does it mean for tech startups looking to raise capital? And how can these founders position their companies to attract the interest – and the investment – from venture capitalists who are facing some of the same pressures?
Jack Hilton, startup advisor, manages Bounce Innovation Hub’s software accelerator where he specializes in fundraising and strategy. He says during a recession when investment is down, startups should focus on three key areas: their finances, labor and mindset.
“It used to be that you needed to spend to grow, but with no capital, the shift has to be on doing more with less, cutting unnecessary expenses and increasing revenue with a greater focus on sales,” he said.
Doing more with less also applies to labor costs, so this is a time to “hire slow, fire fast.”
“Founders want to be ‘big picture,’ but they may have to go back to day-to-day operations to save money, shoring up their business with their time,” Jack said. “Changing mindset means staying positive even if sales are down and you are losing customers. Survival means you win in a downturn.”
This is also a great time to lean on the resources available at Bounce.
“Our entrepreneurs in residence can help with all facets of running a business. They’ve been there, so they understand how to operate successfully through some of these same challenges,” said Doug Weintraub, Bounce’s chief executive officer. “During the pandemic, companies learned to pivot. Now we have financial challenges that are providing opportunities for companies to recreate themselves. Those that are lean and mean will be more attractive to investors and better acquisition targets. Good ideas continue to get funded.”
Bounce also helps its startup clients keep overhead low with co-working space and affordable rent in the Technology Incubator.
“The core fundamentals of a good startup are still at play,” added James Hilton, senior director of Entrepreneurial Services at Bounce. “Pre-seed and seed capital are about the same right now, but will lag eventually. Subsequent funding is harder, so startups must persevere.”
“Previously, investors were focused more on top-line growth, but as venture capitalists are naturally pulling back as the cost of money has gone up, they want proof that you are operating efficiently, hiring the right people and spending wisely,” Doug said.
This changed attitude toward cash means that startups must look at how to increase margins and demonstrate positive Earnings Before Interest, Depreciation and Amortization (EBIDA).
“Great ideas can have negative margins,” said Doug.
James also noted that while investments are not dead, investors are much more selective, often with more stringent terms.
“Although we are seeing lower valuations, if you are doing well, you will find investors,” James said. “There are also promising signs that globally this is predicted to be a record-breaking year for venture capital, and there’s an estimated $200 billion in “dry powder,” unallocated capital that is ready to go. However, Ohio and the Midwest are still unique in that there isn’t an abundance of capital, so we’ve always operated in a recession.”
While capital may be harder to come by, tech startups should still be discerning when it comes to seeking investors by finding the right partner and not just a check-writer. It may also be a time to consider a business or personal loan to provide the extra runway, while preparing for a subsequent upturn.
“A bad economy doesn’t stop innovation, and many big companies were born during a recession. It may force those who are not fully committed from taking the plunge,” Jack said.
For those who are committed, “this is a time to find people who can help you, take one day at a time, work on areas to help your business grow and be ready to pivot,” Doug said.