How early-stage startups are adapting to the new venture capital landscape

Bill Gurley of Benchmark tweet In April 2022, “an entire generation of entrepreneurs and tech investors built their full view of valuations in the second half of an astonishing 13-year bull market.” Startup founders as VCs raise more money Get used to certain key performance indicators (KPIs) set by VCs who also provide huge financing. Global economic challenges and volatile stock markets have created a whole new venture capital market. Business plans, go-to-market strategies and valuations are all tailored to certain VC criteria and are being forced to change rapidly.

VCs are now more cautious about their money, and they are shifting targets unilaterally. They increased expected KPIs and milestones, while also reducing investment amounts—a significant disruption to startups’ plans and ultimately, their business decisions and approach.

This trend of rising KPIs and falling investment rounds will continue for some time, leading to continued uncertainty and greater difficulty for startups to thrive in the market.

While the picture looks bleak, there are things companies can do to mitigate the damage and set the stage for long-term success. Here are a few strategies we recommend for early-stage portfolio companies.

By calculating your valuation forward instead of backward

To avoid running into a funding wall in the near future, calculate your valuation based on what you think will be a few years from now, then work backwards to your valuation today. This is an important mindset shift for the founders. It encourages companies to “test” their valuations with others in the industry, especially those that are already publicly traded, and therefore adjust for market changes to obtain more accurate and realistic valuations. It’s also a prudent strategy: If your valuation is too high today, you risk an unwelcome downside bout tomorrow. In short, future numbers help to “future-proof” your current numbers.

Decide what to give up when raising money and go beyond checks

When engaging with VCs today, it’s critical to prioritize and identify your needs. As with any complex decision, it’s easier to decide ahead of time what you’re willing to be flexible about than to change course after the fact. The quality of the investor, the size of the financing, the terms or terms, and valuation are all factors to consider when raising capital, but for now founders need to resist the temptation to focus on company valuation.

In this environment, an intuitive but limited approach to starting negotiations based on valuations can backfire.Challenging terms must be kept to a minimum, ensuring the size of the financing is sufficient to fund the company’s future growth, and prioritizing the right investor. Only then can the valuation work.

Improve efficiency and extend runways

Rapid growth has been the watchword for tech companies for much of this bull market, but is now being replaced by an emphasis on profitability and efficiency. Can you reduce unnecessary consumption to achieve sustainable income faster? How do you demonstrate product-market fit while maintaining capital efficiency?

These are questions that are increasingly being asked by board members and investors, and prioritizing the answers while making a conscious effort to improve efficiency is key to giving the company as much runway as possible and attracting investors as much as possible.

Raise money even if you don’t need it

The easiest time to raise money is when you don’t need it, and taking this step and preparing for every eventuality can prevent situations where founders are desperately trying to raise money at the expense of other pressing company issues.

Even if you have a 12 to 24 month runway, raise money now if you can. Go to your insider investors, take a hit on your valuation, or raise a smaller round if necessary. It also shows that your company is the type of company that can raise capital in any financial environment.

Get ready for a knock-on effect

Keeping an eye on all the players in your industry and the challenges they also face enables you to make sound business decisions in an unpredictable and sluggish market.

This trickle-down effect means you need to spend more time demonstrating the value of your services to increasingly stressed customers. Do you need to adjust your approach to the market in response to change?

Agile makes all the difference

The good news is that many of the best companies actually emerge during market corrections, and the savvy today may end up paying off in years to come.

This is reminiscent of an anecdote: A few years ago, the organizers of the Jerusalem Marathon messed up the race’s logo, causing runners to inadvertently add a few kilometers to the wrong path. Incredibly, the winner of the marathon isn’t necessarily the biggest bet, but someone who realizes the signs are misleading and heads in the right direction.

Is he the fastest runner? No, but he is the most agile.

You can weather the new investment climate – just make sure you’ve taken steps to move in the right direction.

Judah Taub is Managing Partner Hertz Ventures.