3 reasons why early stage founders should ignore the doom mongers

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Building a startup has always been an incredibly difficult task in all market conditions

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There seems to be an online competition going on to give the most pessimistic advice to founders. A quick scroll on LinkedIn or Twitter will have even the most optimistic CEOs shut down their company and run for the hills. This kind of blatant talk of doom might be good for views and likes, but it’s bullshit.

For starters, the venture capital market cannot be thought of as a homogenous mass. The advice given to founders raising a Series C round should be completely different from that given to founders raising a Seed or Series A round. Yet online commentary rarely makes that significant difference, reverting to overly negative, unhelpful generalizations.

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This is also not the first time we are facing recession. Many founders and investors would not have lived through the dot-com bubble or the Global Financial Crisis. For those who have, the present circumstances are familiar and not unprecedented. Like all gloomy economic times, there are challenges and risks, as well as opportunities.

For founders in the early stages of building a venture-backed startup – that is, before raising a Series A and getting involved – there are reasons to be cautiously optimistic.

the seeds are round

Much of the commentary surrounding the overall health of the venture capital funding market looks at shorter time frames. Headlines announce that there is less venture capital funding in 2022 versus 2021. There are good reasons not to be overly concerned with digging too deep.

First, early-stage funding has been least affected and still amounts to $34 billion globally in the third quarter of 2022. A decline of 25% quarter on quarter and 39% year on year versus 2021 is some meaningless comparison. Venture funding could not keep up with the rapid growth and it was only a matter of time before a reform took place. Furthermore, and to make an obvious point, billions of dollars are still going to early stage companies around the world – the supply of capital will naturally ebb and flow.

Second, looking at UK venture capital funding since 2013, the long-term trend has been upward, with an anomaly in 2021. Compared to all the years prior to 2022 through 2021, the funding numbers are still relatively healthy. And this is understandable. As a (pre-)seed stage investor, exits are so many years away that prevailing macroeconomic conditions have relatively little impact on decision making.

The danger for founders is setting expectations assuming that 2021 was a normal year and that the need to raise is still the same. Lower capital (vs 2021) and re-calibrated risk appetite have resulted in raising it harder, but founders are still closing seed rounds. The market has changed but remains open.

Series A Funds Active

For Series A funds, 2021 was a challenging time. Valuations were skyrocketing and the fundraising process was moving at an incredible pace, making due diligence and strong decision-making challenging For many funds without a premium brand, getting access to the best companies was a struggle. Things have become normal in 2022.

Looking again in comparison to 2021, Series A funding is the least affected in 2022 – down just 23% year over year. This reflects the fact that many strong companies were raising funds and constantly hungry to invest in them.

The recalibration in Series A affects the founders in a few ways.

Notably, valuations have come down from their 2021 highs. A heavy run at higher valuations in 2021 now looks bleak at best or worst. They are also causing headaches for founders who are struggling to grow them and raise their next rounds on favorable terms. Today, giving your company more money for less money than it did last year may seem like a negative, but in order to raise a reasonable amount of money at a reasonable price, you had to put in a sensible dilution before the boom and future. Will continue to work in Future.

The type of fund in the Series A market is also evolving. Multi-stage funds are cautious, busy taking care of their later-stage portfolio companies, some dipping their toes in the water with seed checks to stay active and relevant (and helping LPs justify their management fees). We do). The stage specialists are enjoying their moment in the sun – having been able to win the opportunities they could have had in 2021. Processes have become longer and take more founding time than before as funds delve deeper into each opportunity, eager to avoid any sub-optimal decision- making. This is laborious for the founders but results in more durable early relationships with investors.

Expectations in Series A have also been reset to pre-2021 levels. Gone are the days of pre-emptive rounds when companies only had a few hundred dollars in revenue. The metrics that founders need to have a realistic chance of securing a Series A funding round are fluid, but the now famous SaaS Funding Napkin is a helpful guide.

Lower valuations, longer processes, and more rigidity around required metrics don’t sound like good news for founders, but they in reality represent an overdue return. They also do not mean that the market is closed. Like seed (and pre-seed), funding levels in Series A remain strong against historical norms and many founders are consistently closing rounds.

time is on your side

Early-stage founders will be looking for growth funding several years from now – beyond Series B. Growth times are tough today and no one knows when the current cycle will turn. However, in two or three years we are likely to see a return to the declining public markets with increased capital and risk appetite. Nothing is guaranteed, but founders who started or started early on their journey are now in a much better position than those who unfortunately got caught in the eye of the storm.

Founders who read advice to downsize their workforce, dramatically cut marketing budgets, aim to ‘survive by default’ or close their company should think carefully about whether this advice is relevant and proportionate. In these challenging times, many commenters are taking worst-case scenarios to generate clicks, or extrapolating their personal experiences to speculate about the entire venture capital market.

Being the founder of an early stage company has always been tough. It’s tougher in 2022 than 2021, but not materially tougher than it has been in the last few decades. The correct approach is cautious optimism, shutting out the noise, taking advice from a small number of people you trust, and not letting fear control your actions.

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