Having a clear journey has its own set of maxims for startup founders. Investors generally agree that a successful fundraising should leave a startup with 18 to 36 months of capital, and when a startup has around 9 to 12 months of cash, it should start raising its next round.
But what should startup founders do when they see the end of their road quickly approaching, investors disappearing, and there are fewer and fewer ways to raise more capital?
Historically, the most cited and repeated advice has been to reduce costs, above all.
But the rules are for standard times. The economy hasn't been this volatile for years, and today's founders almost have to run the table: strategically cutting costs where it hurts the least, managing headcount to keep growing, keeping a close eye on how growth is shaping up. and adjust consumption rates accordingly, among other measures.
Still, the rules persist for a reason, and several investors agreed that cutting costs remains the best way to squeeze more out of a startup's bank balance if a fundraising isn't on the horizon.
“The moment a startup anticipates a material slowdown in revenue or a decline in customers, it must reduce costs, no matter what,” said Christian Narvaez, founder of Rayo Capital. “That would be the first step and would help broaden his journey and give him time to raise funds. Second, if you are running out of capital, think about what is happening.”
Unfortunately, many startups will have disappeared. That's the nature of today's fundraising environment.
Qiao Wang, Senior Contributor at Alliance DAO
Kelly Brewster, CEO of bitcoin-focused accelerator Wolf, emphasized the importance of recognizing one's circumstances, especially if they are dire. “There are only a few levers you can pull. If you only have two or three months left, you have no options. He must pay severance payments to employees, the outstanding tax bill, and close the company. Or you may find yourself in an even worse situation.”
Regardless of the outcome, if you have less than 9 months of experience, “unfortunately, you have to reduce the consumption rate and let the good people go,” said Qiao Wang, senior contributor at Alliance DAO.
The vast majority of startups' expenses are human resources or salaries, and reducing them is the best way to reduce expenses and expand the journey, Wang said. emerging companies They just don't need that many people. To the majority of founders They love to hire people before they have a product market fit. “If they let some people go, it wouldn’t reduce their chance of success.”
Wang's words contain a lot of truth. These past few years are testament to the fact that companies often overhire, especially when hype, FOMO, and optimism drive decisions rather than measured consideration of what the company truly needs.
The best way to consider what you need to spend is to not scale prematurely, according to a portfolio manager who manages more than 300 web3 portfolios. “If the product doesn't fit the market, don't scale the business development team yet. And the opposite is true: if you overdo it at first, it's best to reconsider. Do you really need a team of 30 people or can you manage with less? The balance is around talent,” said some anonymous investors.
When capital is cheap, startups can often afford to give up incremental revenue on the path to their planned future, but in more frugal times, take advantage of short-term revenue opportunities while maintaining a path toward a future. better and well planned can help. So once you've eliminated those expensive branches, you need to try to generate revenue and focus on user acquisition, as that's what will keep investors at the table when you go out to raise funds.
“I look for companies that have a clear path to making money. “I know it’s ridiculous to say, but in the startup and crypto space specifically, we look for companies that offer their customers something they are willing to pay for now, not years from now,” Brewster said.
The web3 portfolio manager agreed: “At the moment, to get investments, the requirements have increased; "It's about prioritizing attracting users and keeping them loyal."
Devalued valuations
During the last bull market, many startups ended up overvalued, given the hype around startups (especially web3) and strong investor demand. But something else was pernicious for startups around the world: deals were closed quickly and easily.
That raised expectations of quick and easy fundraising rounds, but the reality is that the due diligence required is much stricter today. Investors want to keep their capital close, which means cash-strapped companies need to remember that fundraising is a much longer process than it was 18 months ago. “Fundraising has been going on for 3 months or more in this market,” said Narváez. “If you have experience, you can make a tight increase in 2 months, but now it is difficult.”
Things are even tougher for web3 startups, given the persistent uncertainty and bearish sentiment around the crypto industry. Macroeconomic conditions and regulatory uncertainty are playing against cryptocurrency startups' fundraising hopes: Cryptocurrency funding declined for the fifth consecutive quarter in the second quarter to $2,34 billion. Interest rates are higher, making it harder for everyone to invest, and major US government agencies are also cracking down on the crypto industry, which is further deterring already cautious investors. .
Venture capital firms are also not raising as much capital as before, meaning there is less dry powder to deploy, the web3 portfolio manager said.
This means capital deployment has slowed across the board and fewer checks are being written. The end result of this situation is likely to be that founders will have to settle for an unfavorable valuation, Wang said. “Many startups got really high valuations during the peak of the bull market, so they have unrealistic expectations about what they can get.” during this bear market. Many things are rising with the same valuation as two years ago, despite having made progress.”
The bull market allowed startups to dictate crazy valuations because they could, Narváez said. “Then they realized that they were not thinking about Serie A, the Serie B and Series C; “They were only thinking about the now and that hurt a lot of people.” Brewster also noted that he sees a number of flat rounds in startups that have grown and can raise at the same valuation as their last capital raise during the previous bull market.
Raising a flat or bearish round is “horrible for investors.” Limited Partners (LP) that they invested,” said Narváez. But flat or down rounds may not be "attractive" to new investors if they don't receive a "massive, aggressive discount," which puts startup founders in a difficult situation.
However, it is not that the wells have run dry. Startups can raise capital, but not on the terms they (or their current investors) would like, investors said. If flat or down rounds aren't an option, a company trying to raise a Series A could do an extension round instead of something larger "if it's not 100% ready to go to the next level," the manager said. web3 portfolio.
There are also other opportunities besides fundraising. Startups can be acquired directly or through a type of acquisition-hire agreement, Wang said.
So the consensus seems to be: if there is no need to raise funds, it is probably best to wait for more favorable fundraising conditions for founders. When could that be? We're not sure, but Wang believes there will be better times in a year or two.
Closing the store
If you've tried everything and are still running out of money but no one is coming to your rescue, it might be best to quit while you have a head start.
It's important to be realistic, Brewster said. “Startup founders tend to be optimistic, passionate, and don't listen to people who tell them things that can go wrong. They like to see the benefits and that doesn't work well when it comes to financing. “You have to be impassive and objective with numbers and data.”
“Unfortunately, many startups will be dead,” Wang said. “That's the nature of the fundraising environment right now. I always tell our startups before they reach that point of no return, don't scale prematurely or overhire. It doesn't increase your chances of finding product-market fit. These new companies are doing well, they have low consumption and much more possibilities of finding a suitable product.”
Narváez said he has personally seen between five and ten web3-focused startups closing this cycle. “With all these people I know and their businesses, already canceled, there were decisions that they could have made sooner.”
While he felt some founders were overconfident and arrogant, he also found that experienced traders who had been through previous cycles chose to shed layers of fat quickly. “They act quickly because they understand that this is going to be a long time. But the founders whose companies died, it was the first time they built through a down cycle. As I mentioned, cut down on unnecessary expenses as much as you can.”
The sad reality to remember is that most early-stage startups fail, Brewster said. “Many people are fighting this. It is the rule, not the exception, and it is difficult.”
