Investment and startup insights for the first half of 2023

This article was contributed by Andrew Bolwell, Chief Disrupter and Global Head of HP Tech Ventures

The current macro-economic environment has significantly impacted venture capital (VC) investing and startup funding over the past year. While two major startup investments helped U.S. investments bounce back from a four-quarter decline, the number of U.S. deals is still declining, with Mega deal count (>$100M funding rounds) off by 75%.

Some analysts believe the current investment trends will start to rebound with time, but the current funding environment has implications for all startups, especially those looking to raise money.

Here are a few key insights startups can use to weather the current investment storms:

Create a runway.

Startups that need to raise now are finding it harder, leading to down-rounds and more startup failures.

The tightening funding environment has made it more difficult for startups to raise capital, with 47% of startup failures in 2022 due to a lack of financing. Startups that were previously able to secure funding at higher valuations are now facing downward pressure on their valuations, impacting their ability to attract new investors. Down-rounds can have significant consequences, as they can dilute existing shareholders’ ownership stake and undermine investor confidence.

Funding rounds are also taking longer to come together. According to Sifted, the whole process of raising seed funding these days — from starting out to getting cash in the bank —  usually takes between three and six months, and in the current environment can often take a lot longer.

Furthermore, the implementation of pay-to-play provisions is becoming increasingly common. These provisions are designed to pressure existing investors to commit additional capital as part of a fund-raise, typically by creating a negative financial consequence if they don’t.  This is done to demonstrate investor confidence and commitment to potential new investors, which greatly increases the startup’s chance of attracting new investors into the mix.  However, these provisions can also create challenges for existing investors who may not be willing to invest more capital into a struggling startup.

The challenging fundraising environment highlights the importance of carefully evaluating investment opportunities and the need for startups to adapt their fundraising strategies to navigate these challenging circumstances.

My advice? Startups should be willing to give on investor-friendly clauses to bring money in the door. A wise person once told me, “A startup goes out of business when they run out of money,” so give yourself as much time as possible to raise your round and be willing to give on investor-friendly clauses to bring money in the door.

Bring your A-game.

When raising money for your startup, it’s crucial to be prepared to bring your A-game to the due-diligence phase. This phase thoroughly examines your business’s financials, operations, and overall potential. Investors will scrutinize every aspect of your venture to assess its viability and potential risks.

To navigate this phase successfully, thorough preparation is paramount. You should deeply understand your business model, market dynamics, competitive landscape, and growth strategy. Your financial records must be impeccable, showcasing transparency and accuracy. Additionally, anticipate and address potential red flags or areas of concern proactively. Spend time prepping your data room with quality and professional-looking content.  Demonstrating your commitment, expertise, and attention to detail during the due-diligence phase increases your chances of securing the funding you need to propel your business forward.

Relationships are everything.

Invest time in networking, nurture your connections, and overcommunicate with your investors and shareholders. Build trust by delivering on your commitments. Building and nurturing solid relationships with investors, industry professionals, and mentors can provide invaluable opportunities and insights. By connecting with like-minded individuals, startups can share knowledge, exchange ideas, and gain access to potential investment opportunities that may not be readily available elsewhere.

Moreover, relationships in the investing world can lead to partnerships and collaborations that can increase the likelihood of success. Networking is responsible for the success of 78% of startups. Ultimately, relationships and networking serve as the foundation for creating a supportive and well-connected investment community, enabling startups to navigate the complexities of the financial landscape more effectively to achieve their investment goals.

Be strategically relevant.

Corporations are also feeling the economic squeeze and are being more discerning about their investments. Corporate venture capital (CVC) investors accounted for 26% of all global funding in the year’s first quarter, up 20% from 2022. Those investments, however, are increasingly strategically aligned with their corporation’s short and long-term business goals.

If you are interested in (or already have) CVC investors, do everything you can to become strategically relevant to them. Do your homework and know their current business focus and how you relate to that.  Listen to their CEO on earnings calls to know what’s strategic to a company.

Establishing strategic alignment is crucial to be relevant to corporate venture capital investors. By aligning business models, technology, or market positioning with the interests and needs of CVCs, startups can increase their chances of attracting investment, and CVCs can ensure a good fit. Startups that align their strategic goals with CVC investors are more likely to receive follow-on funding and partnership opportunities, resulting in long-term strategic relevance.

Focus on customers and business fundamentals.

In recent years, there has been a noticeable shift in the startup ecosystem as companies and their investors return to business fundamentals and embrace a customer-centric approach. Focusing on understanding customers’ needs and building products and services that genuinely cater to those needs sets your company up for success.

According to a Fundera study, 14% of startups fail due to disregarding customers’ needs. This hyper-focus on customers has become a cornerstone for many successful ventures, as they recognize that sustainable growth and profitability are not possible without a solid customer base.

There is also a renewed emphasis from investors on the need to meet budget and business plan commitments. This shift reflects a more disciplined and strategic approach to running a business. As a startup leader, you should thoroughly plan your business financials, set realistic targets, and hold yourself and your team accountable for meeting those goals. By adhering to budgets and business plans, you build trust with your investors, increase your chances of attracting additional funding, and demonstrate an ability to execute your vision.

Be open to learning from your customers and even pivoting your business if needed. Focus on unit economics and profitable growth. Don’t leave sales, channel strategy, and Go-to-Market plans as an afterthought to product and technology. Scaling a business is hard work.  Stay focused. Lead with vision. Trust your team.  But most of all, have fun!

Now more than ever, it’s important to get back to the basics of all successful businesses – stay focused on customers, deliver on commitments, build and nurture your relationships, and work with your investors as partners. With the right approach and attitude, even in this difficult environment startups can still secure funding, grow their businesses, and thrive.