By Fernando Berrocal

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Today, different people in the venture capital environment (VC) are suddenly much more cautious with their funding cash. With lowered valuations and widespread layoffs in any type of business, the technological industry has been badly affected. What does this imply for young businesses looking to raise capital? and the most important question will be: What can you anticipate for the future?

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The effects of a speculative explosion are currently being felt. After years of exaggerated valuations, the market is adjusting, making it more difficult to raise money. However, you shouldn't worry too much if you're still in the seed (or pre-seed) stage. The businesses that grew inflated during the bubble will be hardest hit. In this post, we'll offer you some suggestions for fundraising in this unique landscape. Be aware that it doesn't depart from what we've been saying up to this point. You can withstand this storm by concentrating on your foundations–and keeping an eye on the big picture.

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If you joined the startup scene before the pandemic, your perception of what is typical can be distorted. Investors have recently started distributing an insane amount of cash. What is the normal cap on a pre-seed or seed environment? In the bigger picture, it might be anywhere from $1 to $3 million. That is presuming they have a novel idea, and are aiming for a sizable market. Such businesses were valued between $10 and $15 million last year. A few exceptions reached $20 million. 

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Keep in mind that we are discussing startups that have not yet developed any products or made revenue. This raises a relevant question: how could VC investors justify placing those bets on a business so unproven? It was done because everyone else was. Since their next investment round will possibly result in an even higher valuation, businesses didn't have to worry much about failing. The fact that the economy was doing well didn't hurt. Market speculation has dominated the VC industry for the past years; as a result, startup valuations were significantly greater than their financials justified.

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• The pendulum is returning.  A few significant changes in recent months have significantly reduced VCs' level of confidence. Supply chain problems and growing inflation are also prevalent. An enormous speculative investment in a start-up suddenly doesn't seem like such a good idea. Thus, capital is becoming scarce. For the startups who were swimming in all that venture money, that is bad news. They must accept a down round at a significantly lower value to raise money, and it sends the wrong message to other investors. Sometimes it can start a race to the bottom that destroys the value of the stock.

As an alternative, investors frequently impose restrictions on an organization's subsequent investment round. They will advise founders that to maintain their high valuations, they must achieve significant profitability goals. For startups that have spent years putting off revenue while seeking growth, that is a challenging request. They frequently have to decrease expenditures, which usually entails layoffs. All of this has a certain injustice to it. Investors were frequently pressuring these businesses to prioritize growth over revenue. They are now making a U-turn and requesting financial accountability. As a result, entrepreneurs and IT workers pay the price for the VCs' reckless wagers.

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• The new players have better news.  We've just presented a depressing image. You'll see that we were discussing the startups that became successful by consuming all that free money. You shouldn't worry as much if your startup is in the seed or pre-seed stage. That's in part because you won't fall quite as far. You don't need to rush to keep your runway if you aren't funded yet. Additionally, you shouldn't worry about a “down round” if you are not pegged to an absurd overvaluation. Investors currently favor smaller firms that aren't pursuing high valuations. Think about it: there hasn't been a five-year speculative bidding war to increase the price of your shares.

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• Maintain focus on the numbers. The lesson of this tale is to use facts to firmly ground your fundraising objectives. Never aim for the highest valuation, and always have a plan for achieving profitability. As your business expands, you can't rely on investor money to keep you viable. Before approaching VCs, focus on proving the viability of your company model in the market. Find a way to reduce your sales costs so that they are less than your customer's lifetime value. Then, seek out money to assist you in expanding. Set your valuation based on what you need; not how much you believe you can receive if you require venture funding to construct your product. Determine the costs for your business, then bargain for a valuation that delivers you that sum.

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• Take a long view.  Although the capital market may seem scary, one important lesson to learn is to not pay too much attention to market movements. Yes, you must adjust to changing economic situations. However, consider the long term when determining the value of your business. For the next five to ten years, at least, you'll be managing your startup. During that time, there will be some changes in the market. This precise cycle of rising valuations and a crash will probably repeat itself in around a decade. Because of this, you should base your planning on precise figures like lifetime value and cost per customer.  Bear in mind that if you expect the market to continue acting as it is now, you will be let down.

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In conclusion, for the foreseeable future–-at least the next year or two–capital will be scarcer than it is currently. If you're still managing a young, dynamic startup, that shouldn't scare you. It shouldn't alter your fundamental plan either. Before pursuing capital, get your foundation in order.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.