Funding Downturn And What It Means For Entrepreneurs

Last night, I was sifting through my inbox, when I noticed a pattern.

Mail 5: CEO of a $1m seed funded company informing me that they’re shutting down shop since neither the Series A nor the bridge loan came through.

Mail 67: Another seed-funded company planning to wrap up operations at the end of the month.

Mail 96: A B2C startup with 1M active users but with no clear path to monetization. Unsuccessful in raising any money. Hoping for an aquihire, but planning for a shutdown.

Mail 128: CEO of a well-funded seed-stage company (high single digit, in millions) had to sell because they’d run out of money. It was an acquihire – so the team stayed intact, the product wasn’t shut down. They consider themselves lucky.

Should entrepreneurs be worried?

According to CB Insights’ annual report, the first quarter of 2016 saw the lowest number of deals worldwide in nearly three years, down by 15% from Q4 2015. Interestingly,  according to another report, Series A deals made up 48% of Q1 transactions, a level not seen in over a year. However, total dollars invested were the lowest since Q3 of 2014 for the U.S.. Even Asian markets have taken a hit, with funding down 32% (in dollars).

Yes, entrepreneurs should be worried.

VCs have less funds available. (No exits lately!) If they have a portfolio of ten companies, they’re analyzing them, and backing the winners, instead of equitably distributing the available funds between all of them. Think of a mother picking favorites when there are five kids to feed, and food only enough for two of them.

What can entrepreneurs do?

Raising funds is going to get even more difficult. Call it a correction or a normalization, the bottom line is that there are going to be more unicorpses than unicorns this year.

Here are some tips for early stage startups:

  1. If you are raising funds: Aspire to raise a larger amount than planned, since the next opportunity for fundraising may not come soon. This strategy is different than the past strategy of raising a very small pre-seed or seed round, getting traction, and then going for larger rounds.

Because, well, you will probably not be around for that round.

  1. If you are not or cannot raise funds: Cut down your expenses.Ruthlessly prioritize.

If you are still building your MVP, don’t invest in a sales and marketing team just yet, because they don’t have anything to sell.

If your product is ready, see where you can scale back on the R&D spend, and put all that you have in your sales team. Lean in. You are guaranteed to NOT get traction if you don’t invest in sales, so why not risk it?

  1. Track your KPIs. If they are looking good, you’ll survive. Focus on customer validation and your monetization path. Your metrics should prove two things:
  1. You’re actually solving a problem
  2. The problem is so significant that users spend a good chunk of time on your product, and not just two minutes a day.

Sad fact: If you are running out of money in 2016, and KPIs don’t look good – you’re in trouble.

  1. Approach your current investors, have a heart-to-heart. Figure out if you’re the favorite child, or the one who’s going to be left to die. If you think you might need money, discuss the possibility of bridge financing before you go for the next round.

I know the situation is difficult, but in the long run, this is a good change. Evolution is at work. The strong will survive. This will make companies more resilient, and will make sure the more deserving ideas get funded, and competition gets thinned. The capital to go around is limited, and with less startups clamouring for their attention, the money would be spent more judiciously.

However, if you’re the ones left in the cold…stop worrying.

Welcome to the graduation ceremony of the School of Hard Knocks. Learn from your mistakes, prepare for the next cycle, and come back with better ideas.

And if you need a sounding board for those ideas, I’m available on LinkedIn or email at sshroff@mystartupcfo.com.

Good luck!

1 comment

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