Financing for start-ups: back to earth – Companies

The fundraising context, which the young shoots specialize in, is at half-mast. Tougher trades, valuations that melt like snow in the sun… Worry for founders, sure, but simple return to normal say experts and investors.

The current economic downturn is hitting tech startups like any other business. However, it is usually not so much rising energy prices or fears of customer shortages that worry them at this stage, but the prospect of more difficult financing. As we know, many young sprouts evolve in the fundraising model: to develop, they raise funds from investors in exchange for shares in the company. This allows them to have the necessary funds to create their product, hire the first employees, ensure marketing and development.
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The current economic downturn is hitting tech startups like any other business. However, it is usually not so much rising energy prices or fears of customer shortages that worry them at this stage, but the prospect of more difficult financing. As we know, many young sprouts evolve in the fundraising model: to develop, they raise funds from investors in exchange for shares in the company. This allows them to have the necessary funds to create their product, hire the first employees, ensure marketing and development. But if in recent years the proliferation of structures (private and public) and business angels has made money much more accessible, the current crisis is clearly changing the situation. “In theory, we should raise funds in 2023, but the context is clearly not good, admits this entrepreneur at the head of a start-up in Brussels. .” This strategy, this start-up that sells software as a service (software by subscription) can pay off because it has recurring revenues and some reserves from its previous funding. And even though the company is still not profitable, its founders have agreed to reduce investments that would have guaranteed maximum growth.” When we saw the context, we quickly prepared a plan to extend the runway, that is, the duration before running out of money, this young boss slips us from a box of 10 more people. the heart of our business, eliminating risky bets and having much greater financial discipline. We have also postponed strategic decisions such as opening new markets or launching new products or functionalities. The idea is really not to take additional risks.” Other structures, however, go even further in the need to contain their expenses, in particular by reducing the wing between teams. Not least because the economic situation and prospects worry the various ecosystems… “The market that was in the hands of start-ups is now in the hands of investors”, observes Frank Maene, managing partner of the Volta Ventures fund. He understands that, from now on, startups are no longer dictating the law, but who allocates resources. After two years during which start-ups had no problem finding money and enjoying great valuations, things have now completely changed. “It’s not that there isn’t more money, observes Frank Maene. It’s still available, but investors don’t pour it in so easily and they don’t sign terms after just two meetings. Now everyone is much more cautious.” It is true that in the midst of covid, when digital was showing all its importance, start-ups were spoiled and no investor wanted to miss out on a good dossier. Today, caution seems more appropriate on the side of venture capital (venture capital) and funds. With, as a consequence, a true melancholy among entrepreneurs in search of financing. “It’s an obvious reality, points out Thibaut Claes, investment manager at SRIW. Many deals today disappoint founders, either because the amounts they can raise are revised downwards, or because the valuation of the deals is significantly lower than expected. ” For this technological entrepreneur in full fundraising since the beginning of the year, the context is not, therefore, simple. “Our negotiations take a long time, he admits. And, unfortunately, time is not on our side. When stock markets fall or Putin makes new threats, we suffer the consequences. As we approach an agreement, the conditions are no longer the same as at the beginning of the year, both in terms of operational and financial KPIs (key performance indicators, Editor’s note) to be respected in order for them to invest, and in terms of valuing the company.” This massive scale-up would have seen its new valuation melt by 20% within a few months during negotiations. Admittedly, thanks to the very strong growth it is registering in a rapidly expanding sector, the company appears to be maintaining an attractive valuation, above its very ambitious previous round. But others are much less fortunate, suffering true downturns: this means that cash valuation melts between two funding rounds, being less appreciated in the next round, which is not without its problems. Especially when the drop is particularly significant. This summer, the iconic example came from the Klarna expansion. This Swedish fintech saw its valuation melt down by around 80% during its latest funding round! International stars like Stripe or Instacart also suffered heavy discounts. These rounds down even make Thibaut Claes say that today, “many unicorns, these unlisted companies valued at over a billion, have lost that status”. Hard to say, of course: start-ups usually so inclined to communicate about their fundraising in the press now refrain from disclosing their half-hearted operations. The current reluctance of investors is not unfounded, mainly based on the possible lack of outlets for its young offspring. “Many investors realize that the rounds of the last two years were traded at very high prices and that they lose their feathers, analyzes the SRIW investment manager. So they become aware and are more selective and cautious”. The fact is that the final objective of investors lies in selling their shares, whether in subsequent rounds of financing or resale. But if companies’ valuations drop, they may not find their way, and the situation could be tragic for founders. In case of bearish rounds, the investors who anticipated the ad hoc clauses will, in fact, first want to recoup their bet, forcing entrepreneurs to absorb the shock, at the risk of not obtaining capital gains, or even losing. And in the opinion of the experts interviewed, there is absolutely nothing theoretical about this perspective… However, if many budding entrepreneurs maintain that the financial market is going through an “unprecedented fall” and a maddening situation, on the contrary, experts (and investors ) point to a return to greater normality, after a moment of irrational increase in investments in the sector. “It was the previous two years that were absolutely abnormal,” insists Frank Maene. And Thibaut Claes to show the same position: “The context of previous years was beyond any logic. We saw huge valuations for really very weak companies. Furthermore, if we look at the evolution of valuations and amounts invested over the years, we see that the years 2020 to 2022 were exceptional. Today we are returning to a more realistic and much healthier approach.” Healthier in the sense that investors will once again take a closer look at the real business of start-ups, and not just their future promises. Nascent, struggling startups that have not achieved advertised targets may therefore not be in a good position to extract strong valuations and minimize their dilution. Even to find money. On the other hand, those who manage to show investors the growth of their business and their income should not have many problems, even if the negotiations on their valuation can be more tense. We will still discover very positive deals, especially when companies already have growing revenues and can show a profitability plan. The “growth at all costs” that is no longer accepted (or rarely) and investors that start to worry more quickly about profitability… Not so abnormal after all.

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