The stock market began the new year with a plummet worthy of a jump, with the S&P 500, NASDAQ, and Dow all falling. The precipitous drop resulted in a shaky, hesitant rebound, but shivers still run down venture capitalists’ spines. They are indeed in a precarious position, which begs the question, “Will startup companies go through 2022 empty-handed?” Is that a howling headwind outside?
Not always, of course. It is far too early to draw broad conclusions about the state of the VC world, where things did indeed heat up in 2021. Startups earned $643 billion globally, nearly twice as much as in 2021. On average, 10 unicorns were added to the world each week. The previous year also saw a record number of IPOs, which is where the story becomes a little less rosy.
Almost 400 companies issued stock to the general public, helping to raise approximately $142 billion. However, as VC darlings decided to enter the open market, stuff did not always go as planned. Even a cursory glance at the first ten companies on Crunchbase’s list of IPOs in 2021 reveals that the public market was not kind to many of the newly formed tech companies. While companies were often successful at the start, their success was often fleeting, and the rest of the journey has been either an up-and-down rollercoaster or a decisive slump.
To be sure, no one should predict VCs to be expert fortune tellers, accurately forecasting public market success. Their business is risky, and their competence is in bringing enterprises to market and assisting them in rapidly scaling up. Nonetheless, these IPOs leave VCs with a few unanswered questions, as others can and will factor them into their own calculations. Will venture capitalists be able to raise capital as effectively? Is it time to make more cautious investments? Should startup founders put off VC pitching for the time being?
In today’s market, raising venture capital necessitates a “old new” playbook.
We’re not in a “raise or not raise” situation—a great founder will always be fund-raising, so there’s no need to get Shakespearean here. However, prospective entrepreneurs should tailor their methods to the existing state of the market.
Set your company apart from the competition.
The first step is to differentiate your corporation in your messaging, which is now more important than ever. Assume you are about to dominate the global market with just a brand-new social media outlet in which people can connect with friends, share photos, build a community, and more. In other words, similar to Facebook, and when reaching prospective investors, you will most likely bring up Facebook as an instance about how much momentum your project could generate.
The bad news is that, as of the writing of this article, Meta’s stock is down more than 27 percent year on year, and its platform is slowly losing users. So one of the points you must make to prospective investors is that you are not like Facebook. Describe what your platform could indeed provides to youth, the targeted market that Facebook appears to be struggling with, and all of the market research on which your claim is based. Explain why investors should not be concerned about a Senate committee featuring a worker from your company. Expect questions like this from venture capitalists. Show them how you’re unique.
The importance of timing cannot be overstated.
Another critical factor that founders must consider is timing. Investors are always looking for a business that is about to take off. In a year of uncertainty and economic jitters, they will have to get the most value for the money as soon as possible. And it is this perception that your startup should project in order to attract outside funding.
To be sure, some of this is about optics management, but it’s also about timing. In the current climate, it makes more sense to wait until you are gaining traction before approaching VCs. Is your company about to make its first sale? Good! Is your platform already being used by at least three companies, one of which is willing to provide a testimonial? Better yet! Is the concept still in its early stages as you and your partner assess the needs of potential users? This is less desirable.
Do your research.
Founders must do their homework before approaching investors. A colleague of mine recently witnessed a prospective investor abandon ship at the last minute, with the term sheet still on the table. If my friend had asked a few of his peers what the entrepreneur was like as a partner, he would have discovered that it was not the first time this happened.
Create products that are valuable.
Finally, one constant is the emphasis on trying to deliver value to the client. Products that will get the task done usually last a long time and are less vulnerable to market fluctuations. Companies that create such products will still have an easier time in 2022 than they did in 2020, because the pandemic has did turn more companies into early tech adopters, assisting startups with the “crossing the chasm” problem.
While the market correction may have dampened VCs’ enthusiasm, the crucial tailwinds which filled their sails over the last year are still propelling the room at a rate of knots. The demand for innovation exists, and companies that can provide considerable value will immediately find themselves awash in venture capital funds.
