2 top VCs break down how founders can still attract investment despite the market slump

Picus Capital is an early-stage venture-capital fund that focuses on tech. Robin Godenrath is a partner and managing director at the fund. Bastian Hasslinger is an investor.

In this op-ed, they outline what the slump means for startups and how to navigate a stricter market. Get the latest tech news & scoops — delivered daily to your inbox. Loading Something is loading.

Email address By clicking ‘Sign up’, you agree to receive marketing emails from Insider as well as other partner offers and accept our Terms of Service and Privacy Policy . This is an edited, translated version of an article that originally appeared on May 10, 2022. In the venture-capital industry, 2021 was a record-breaking year: VC investment rose to $643 billion in 2021, compared to 2020’s $335 billion, Crunchbase said.

The Crunchbase report also said that 586 new unicorns were minted in 2021, doubling the number of unicorns in one year. But the record-breaking investment highs of last year now seem to be over. The Russia-Ukraine war, rising interest rates, and falling share prices have resulted in a sharp market downturn .

Rising interest rates are hurting valuations, particularly in the tech sector, as investors look for safer investments. The valuations of listed companies serve as the basis for evaluating private startups. Investors base their investment decisions on the return potential of a company.

If the publicly listed companies’ stocks depreciate, investors will be wary of a startup’s profitability. For startups operating in an industry that’s depressed, such as the current tech market, the startup’s valuation will go down, regardless of the product. There’s a downward trend in the market capitalization of tech companies and significantly lower IPO activity compared to last year.

Listed tech companies have come under heavy pressure, and some have suffered big share-price losses since their initial public offerings. Deliveroo is down 68. 97% over the last year, Cazoo is down 86.

18%, and Robinhood is down 74. 05%, MarketWatch said. Startups that closed financing rounds in the euphoria of last year could struggle to live up to previous valuations in new rounds as the current market’s influence takes effect.

As a result, funding rounds may be at the same or lower valuations than the previous ones, a scenario that everyone wants to avoid. Falling stock prices could also lead to a change in investment behavior. With less attractive exit options, late-stage and growth-stage investors could become more cautious about allocating capital.

Investors could pay more attention to profitability and growth and be less willing to take risks. VCs may allocate funds to startups they invest in over several years, rather than all in the first 18 months, as has recently become the trend. But this downturn doesn’t imply a shortage of capital.

In 2021, US VCs raised $128. 3 billion, PitchBook said, followed by another $12. 8 billion in the first week of 2022, PitchBook reported.

Investors still have money to give to founders who understand how these changing market conditions may affect their business and respond accordingly. Here are four key things startups should be trying to achieve to remain attractive to investors. Sufficient capital Forward-thinking founders should build a healthy cushion that allows for a run rate of 24 months or more with conservative growth.

The goal is to “ride out” potential market corrections without being forced to raise additional capital. Some companies already have to accept lower valuations than just a few months ago, so learning how to go without is crucial. Efficient growth Fast growth is crucial for the success of startups.

But cash burn — the speed at which a startup spends financial resources — should be tightly controlled and reasonable in proportion to growth. A startup should be able to control growth directly via cash burn to react quickly to stricter markets. Knowing when and where to stop spending is something founders should be particularly aware of right now.

Layoffs are a last resort for reducing costs. Willingness to ‘strike’ The market downturn is putting pressure on startups at all stages. Those that can’t control their cash burn, don’t have a long-term run rate, and can’t raise additional capital are in a weak position.

Stronger competitors could and should strike while the iron is hot to gain market share, by poaching employees and even acquiring competitors. Taking advantage of the slowdown Founders need to keep track and respond to market changes as quickly as possible. But founders can also benefit from the general slowdown in VC activity.

Founders can use this time to focus on the core model, the value drivers of the product or service, and sustainable development. A founder having the time to think critically about their business without the pressure of scaling as rapidly is the benefit of a market correction. The goal should always be to build companies with decades in mind, not pursue growth at any price.

Many of today’s most successful tech companies, such as Zalando, Uber, Square, or Airbnb, were either born in crises or had to hold their own in challenging market conditions. The corrected company valuations may lead to high returns on investment, making venture capital more attractive than ever as an asset class. .