3 Reasons Early Stage Founders Should Ignore Doom Mongers

3 Reasons Early Stage Founders Should Ignore Doom Mongers

There seems to be a competition going on online to dish out the most pessimistic advice possible to founders. A quick scroll on LinkedIn or Twitter would make even the most optimistic CEO shut down his company and run for the hills. Such obvious doom may be good for views and likes, but it’s nonsense.

To begin with, the venture capital market cannot be treated as one homogeneous mass. Advice given to founders raising a Series C round should be completely different than founders raising a seed or Series A round. Yet the comments online rarely make the critical distinction, falling back on overly negative, unhelpful generalizations.

Nor is it the first time we have faced a recession. Many founders and investors will not have lived through the dot-com bubble or the global financial crisis. For those who have, the current circumstances feel familiar and not unique. Like all dark economic times, there are challenges and risks, as well as opportunities.

For entrepreneurs at an early stage of building a venture-backed startup—that is, before and including raising Series A—there are reasons to be cautiously optimistic.

Seed rounds happen

Most commentary on the overall health of the venture capital funding market looks at a short time frame. Headlines announce that venture capital funding is down in 2022 versus 2021. If you dig deeper, there are good reasons not to be overly alarmed.

First, early-stage funding is the least affected and still stood at $34 billion globally in Q3 2022. The 25% quarter-on-quarter and 39% year-on-year decline versus 2021 is a somewhat meaningless comparison. Venture funding could not continue to grow exponentially, and this correction was a matter of time. Also, and to make an obvious point, is billions of dollars still goes 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 2021 an anomaly. If you compare 2022 with all the years before 2021, the funding figures are still relatively good. And this makes sense. As a (pre-)seed stage investor, exits are so many years away that the prevailing macroeconomic conditions have relatively little impact on decision-making.

The danger for entrepreneurs is to set expectations to believe that 2021 was a normal year, and that what was necessary to raise then is the same now. It hair have become more difficult to obtain as a result of reduced capital (towards 2021) and recalibrated risk appetite, but the founders are still closing seed rounds. The market has changed but is still open.

Series A funds are active

For Serie A funds, 2021 was a challenging time. Valuations were sky-high and fundraising processes moved at incredible speed, making due diligence and robust decision-making challenging. For many funds without a premium brand, it was a struggle to get access to the best companies. In 2022, things have normalized.

Looking again at the comparison with 2021, Series A funding in 2022 is the least affected – down just 23% year-on-year. This reflects the fact that many strong companies increased and continued the appetite for funds to invest in them.

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

Most notably, valuations have moved off the 2021 highs. Huge rounds of high valuations that were completed in 2021 are now looking over-the-top at best or rash at worst. They also create headaches for entrepreneurs struggling to grow into them and raise their next round on palatable terms. Today, giving away more of your business for less money compared to last year may feel like a negative thing, but within reason it worked to raise the right amount you need for a sensible dilution before the boom and will continue to work in the future .

The type of fund in the Series A market also continues to evolve. Multi-stage funds are cautious, busy taking care of their later portfolio companies, with some dipping their toes in the water with seed checks to stay active and relevant (and justify the management fees of LPs). Stage specialists are enjoying their moment in the sun – able to win opportunities that may have eluded them in 2021. Processes have lengthened and take up more founder time than before as funds dig deep into every opportunity, keen to avoid sub-optimal decision- stocks. It is painstaking for founders, but results in more lasting early relationships with investors.

Series A expectations have also been reset to pre-2021 levels. The days of pre-emptive rounds when companies only have a few hundred thousand dollars in revenue are over. Metrics that founders need to achieve to have a realistic chance of securing a Series A funding round are fluid, but the now-familiar SaaS funding napkin is a useful guide.

Lower valuations, longer processes and more rigor around the necessary calculations do not look like great news for entrepreneurs, but they represent a belated return to reality. They do too not means the market is closed. As with seed (and pre-seed), Series A funding levels remain robust against historical norms, and many founders continue to close rounds.

Time is on your side

Early stage founders today will be looking for growth funding – Series B and beyond – several years from now. Growth cycles are difficult today and no one knows when the current cycle will turn. But in two or three years we will probably be back on the upswing, with capital and risk appetite returning as the public markets thaw. Nothing is guaranteed, but entrepreneurs starting out or early in their journey now are much better positioned than those who were unfortunately caught in the eye of the storm.

Entrepreneurs who read advice to cut staff, dramatically cut marketing budgets, aim for ‘standard alive’ or shut down their business should think carefully about whether this advice is relevant and proportionate. In these challenging times, many commentators take worst-case scenarios to generate clicks, or extrapolate their individual experiences to make assumptions about the entire venture capital market.

Being the founder of an early stage company has always been difficult. It is more difficult in 2022 than in 2021, but not significantly more difficult than it has been in recent decades. The right approach is cautious optimism, shut out the noise, take advice from a small number of people you trust, and don’t let fear dictate your actions.

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