Startup Funding Challenges

There’s no escaping the fact that it’s been a tough year for startups in the tech industry…

The recent market downturn has had a significant impact, with many companies experiencing a drop in their valuations of 50-70%. This has major implications for startups that are looking to raise funding, as venture capital firms will typically use the lower valuations of public companies as a reference point when setting their own valuations. As a result, founders may want to consider raising less money in order to avoid diluting their equity too much, too early.

One potential solution for startups that need to extend their runway but don’t want to raise additional funding is to explore non-dilutive sources of financing such as revenue-based financing, grants, R&D tax credits and possibly even some forms of debt (assuming they can find a way to service the debt – always worth looking at schemes like the HM Government’s Recovery Loan Scheme. I’ll cover venture debt in a separate post). By cutting their burn rate and finding other ways to fund their operations, founders can minimise the amount of equity they need to give up in order to raise capital.

While it’s possible that the current economic climate could lead to a new wave of startups being founded by people who have been laid off from larger tech firms, it’s also important to acknowledge that starting a new company is a risky and financially demanding endeavour. We’re currently experiencing a cost-of-living crisis and many people are struggling with higher mortgage payments, childcare costs, and other expenses, and may not have the resources to take on the risks and challenges of starting a new company.

In light of these challenges, it’s likely that we’ll see more talented individuals joining scaling companies rather than starting their own ventures. These companies may offer the benefits of a more innovative and dynamic culture than many incumbent tech firms, but with the added stability and security that comes from being further along in their growth trajectory.

For founders who are considering raising funds, it’s important to keep in mind the current market conditions and the impact they are likely to have on valuations. By being strategic and exploring non-dilutive sources of financing, founders can minimise the amount of dilution they suffer and maximise the potential success of their company.

It’s also worth noting that the market downturn has not been uniform across all sectors of the tech industry. Some areas, such as e-commerce and online gaming, have actually seen an increase in demand and growth as a consequence of the pandemic. For founders in these sectors, the current market conditions may present unique opportunities for raising funding and growing their business.

My advice is simple – explore all available options, but getting it right and holding your nerve will ensure you don’t part company with too much equity!

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