3 Reasons Rookie Founders Should Ignore Doom Mongers

3 Reasons Rookie Founders Should Ignore Doom Mongers

There seems to be a contest going on online to give founders the most pessimistic advice possible. A quick scroll on LinkedIn or Twitter would have even the most optimistic CEO shutting down their company and running for the hills. Such blatant catastrophizing might be good for views and tastes, but it is nonsense.

To begin with, the venture capital market cannot be treated as a homogeneous mass. The advice given to founders raising a Series C cycle should be entirely different from that of founders raising a Series A seed or cycle. Yet online commentary rarely makes this critical distinction, falling back on overly negative and unnecessary generalizations. .

This is also not the first time that we have faced a recession. Many founders and investors will not have lived through the dotcom bubble or the global financial crisis. For those who have, the current circumstances seem familiar and not unprecedented. Like all dark economic times, there are challenges and risks, as well as opportunities.

For founders in the early stages of building a company-backed startup — that is, before and including the Series A raise — there is reason to be cautiously optimistic.

Seed towers unfold

Most commentary on the overall health of the venture capital funding market focuses on a short period. Headlines announce that venture capital funding is down in 2022 compared to 2021. Digging deeper, there are good reasons not to be too alarmed.

First, seed funding is the least impacted and still stood at $34 billion globally in the third quarter of 2022. The decline from 2021 of 25% quarter-over-quarter and 39% year-over-year is a somewhat meaningless comparison. Venture capital could not continue to grow exponentially and this correction was only a matter of time. Moreover, and to make it obvious, billions of dollars are still going to early-stage companies around the world – the supply of capital will naturally fluctuate.

Second, when it comes to venture capital funding in the UK since 2013, the long-term trend is up, with 2021 being an anomaly. Comparing 2022 to all years before 2021, funding numbers are still relatively healthy. And that makes sense. As a (pre-)seed stage investor, exits are so far off that prevailing macroeconomic conditions have relatively little impact on decision-making.

The danger for founders is to set expectations believing that 2021 was a normal year and that what was needed to grow then is the same now. This has become more difficult to raise due to reduced capital (compared to 2021) and recalibrated risk appetites, but founders are still closing rounds. The market has changed but remains open.

Series A funds are active

For Series A funds, 2021 has been a tough time. Ratings skyrocketed and fundraising processes moved at an incredible speed, making due diligence and solid decision-making difficult. For many premium unbranded funds, it was difficult to gain access to top companies. In 2022, things are back to normal.

Looking again at the comparison to 2021, Series A funding in 2022 is the least impacted – down just 23% YoY. This reflects the fact that many strong companies have created and maintained an appetite for funds to invest in them.

The Series A recalibration impacts the Founders in several ways.

Most notably, valuations have moved off their 2021 highs. Huge rounds at lofty valuations, celebrated in 2021, now look exuberant at best or reckless at worst. They also create headaches for founders who struggle to grow there and raise their next ride on acceptable terms. Giving more of your business for less money today than last year might seem like a negative thing, but within reason raising the right amount of money you need for reasonable dilution has worked before the boom and will continue to work in the future.

The type of Series A market fund also continues to evolve. Multi-stage funds are cautious, busy tending to their later-stage portfolio companies, with some dipping their toes in the water with seed checks to stay active and relevant (and justify their management fees to LP). Stage specialists are enjoying their moment in the sun – able to win opportunities that may have eluded them in 2021. Processes have lengthened and taken founders longer than before as funds dig deep into each opportunity, wishing to avoid any sub-optimal decision-making. It’s laborious for the founders but it translates into more lasting early relationships with investors.

Series A expectations have also been reduced to pre-2021 levels. Gone are the days of pre-emptive rounds where companies only had a few hundred thousand dollars in revenue. The metrics founders need to hit to have a realistic chance of securing a Series A funding round are fluid, but the now well-known SaaS Funding Briefcase is a helpful guide.

Lower valuations, longer processes, and greater rigor around required metrics don’t seem great news for the founders, but they represent a belated return to reality. They also do not means the market is closed. As with seed (and pre-seed), Series A funding levels remain robust by historical standards and many founders continue to close rounds.

Time is on your side

Early-stage founders will seek growth funding today – starting in Series B – several years from now. Growth cycles are tough today and no one knows when the current cycle will turn. However, in two or three years, we will probably reverse the recovery, with the return of appetite for capital and risk as public markets thaw. Nothing is guaranteed, but founders who are starting or just starting their journey are now in a much better position than those who unfortunately got caught in the eye of the storm.

Founders who read tips for downsizing, drastically reducing marketing budgets, aiming for “life default,” or shutting down their business, should think carefully about the relevance and proportionality of that advice. In these tough times, many commentators are taking worst-case scenarios to generate clicks, or extrapolating from their individual experiences to make assumptions about the entire venture capital market.

Being the founder of a start-up company has always been difficult. It’s harder in 2022 than in 2021, but not materially harder than in past decades. The right approach is to be cautiously optimistic, to be silent, to take advice from a few people you trust, and not to let fear dictate your actions.

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