Startup funding is stalling: time to panic?
Here at Activate, we primarily work with UK based early-stage startups who are just deploying their product or service via various digital platforms. Naturally, the situation from a North American or venture capital investing angle looks a bit different.
However, from our UK-oriented perspective, there is far less pressure. This is due to smaller investment rounds, lower valuations, and better tax incentives such as SEIS and EIS. You could even argue that because of the incentives and general poor investment climate in the UK, startups may be one of the best alternatives for investing and could actually attract even more money and funding.
For those founders amongst you who are credible and come with good business propositions, deals will still get done. Yes, the bar is now higher as compared to a few months ago, but you could also argue that this is a correction from the bar being set too low over the previous year.
Into the future
Our advice now is consistent with what we have been advising for years, but we are discouraging short runway take-off more than ever. None of us can with certainty foresee how bad the economic environment will get, nor can we foresee when it will turn around.
As a startup founder, you want to have the liberty to pick your moment to raise, as opposed to being forced into raising because you can’t make salaries next month. You should know by now that this situation never ends well, especially in a sour economy.
Activate has always been advocating for keeping the burn rates as low as possible, or at least until you find real market fit with your product - until you reach this point, it is really all about the product. And that is where the majority of your spending should be going.
Any marketing budget you may have, you should primarily use it for testing your product for market fit. Marketing spend on a product that doesn’t really resonate with the market is just wasted money.
What about hiring?
We say keep it lean as possible until you really need people to do jobs that are either going to add to your customer count or increase revenue - ideally, both.
Even if you can’t find definitive market fit with your product within your current funding bounds, you generally have a much better chance of securing follow-on funding if you can show conservative spending. Staying lean may also allow you pivot to a plan B, trading off growth for profits from a product that is resonating.
So what is the bottom line?
Things are tighter, but if you are a credible founder with a good business proposition you are still going to find money. You will simply need to go the extra mile to make it happen. If you can do this, you will also be better prepared to succeed in the future.
About the author:
Greg Rice is the founder of Activate and director of investments.