Venture capital investment is one of the top places startups look out for when seeking funding for their business alongside other popular options like angel investing and crowdfunding. Moreso, there is a lot of competition with investors doing all they can to determine the viability of a business before putting their money into it.
When anyone asks what investors look for in startups, typical answers include an experienced management team, a large market for their product or service, growth potentials, uniqueness. Lately, the word ‘disruption’ has become a cliche with the rise of companies such as Uber and Netflix, among others; Investors continue to look for startups unique enough to upset an industry significantly. In the same vein, various technological innovations such as artificial intelligence have made VC funding easier and less biased.
However, things have not been all rosy in the VC market. Every expert agrees that VC investing faced a huge setback last year with the IPO flops of major companies such as WeWork, Uber, Slack, and Lyft as the facts show. Therefore, startups can expect investors to make significant adjustments based on lessons learned last year, which are rather harsh.
Stricter Business Conditions
According to Ben Narasin, “in 2020, investors will require firmer governance and oversight structures to safeguard against negative impact and ensure these protections are mandated in their term sheets.”
One of the fundamental conditions for picking a startup is that they have a stellar management team. It is one of the several measures VCs take to ensure that their money is in the most capable hands and would produce desired results.
Well, now investors are desiring to have more say in the direct control of the company, particularly its finances and its compliance with corporate regulations (for example, the GDPR, with tech startups).
Investors would be more strict in their grilling of startup founders and leaders, hoping to expose every hint of “overpromising and underdelivering.” This may probably drive entrepreneurs to alternative funding options, such as equity crowdfunding. Startup leaders hoping to win a VC fund have to be more diligent in doing their homework, fine-tuning their pitches to perfection, and blazing through the interviews.
Stability over Speed
As far back as 2015, Kauffman Foundation had reported that a whopping two-thirds of the fastest-growing companies go under before attaining self-sustainability. Apparently, just because a company is growing rapidly does not mean it would be sustainable.
It is not so uncommon among some companies that grew too quickly to face a downturn of fortunes, usually a result of rash decisions. Therefore, “growing too quickly can be as problematic as growing too slowly.”
Fast-growing startups like WeWork and Uber have taught us that the speed of growth is not always a good indicator of future performance. Apparently, steady growth is now more desirable even if rather slow. It is easier to assess and determine the potentials of a startup accurately if it is stable.“Growth at any cost is not acceptable anymore.”
What does this mean for startups? When they found their businesses, entrepreneurs are usually filled with dreams of how their idea would ‘shake’ the world and want to speed up as much as possible (instant gratification), so much so that slow but steady growth may seem discouraging. Either way (fast or slow, steady) is great, but the most important thing is to not ignore the fundamentals.
The focus of the world is now being directed at critical issues such as global warming, climate change, education, poverty, gender activism — and of course, COVID-19. Likewise, the investing industry is moving in this direction as well to solve real-world problems.
Real-world problems are called “impact investing” where investors are not only looking to make huge financial profits but also to make an impression in the world, or at least their immediate communities. Therefore, they are on the lookout for startups who key into this vision. Besides, such companies are incentivized by the government in different ways, including tax cuts.
One of the insightful facts about impact investing is that it is no longer a small investing niche but has rather grown to be one with opportunities for massive returns just like traditional investing. And there are statistics to back up the fact that impact investments perform well too with at least 66% hitting market-rate returns.
Startups that show that they are solving a global challenge in a way or the other (for example, green tech) have an edge in the investing market.
Startups now realize what they are up against and that they must highly improve their game if they are to win any funding opportunities. The future is not all bleak, but the competition has just become stiffer. This may mean smaller businesses getting pressed out of VC funding opportunities as investors would rather fund companies that have achieved significant growth already.
Finally, it is apparent that 2019 was a less successful year for VC investing and CrunchBase described it as a “good, but not a fantastic year,” based on more impressive expectations. A less successful 2019 has caused 2020 to be more unpredictable, though many remain optimistic. [Well, that was before the COVID-19, so we’ll see what happens now.]