There isn’t much hope that 2023’s fundraising environment will be better for startups than last year’s. It seems likely that it will get worse before it gets better — even at the earliest stages, which have largely been insulated thus far.
But for burgeoning companies capable of building business models that reflect current conditions and rely less on venture capital to grow, the frosty environment could wind up being a good thing down the line.
While some sectors need to raise a lot of capital to build a viable business, like space and defense or manufacturing, most don’t — but that didn’t stop companies from collecting oodles of dollars during the past few record-breaking years. But it’s better to just raise the smallest amount you need, which many startups are now discovering.
“I can’t tell you how many companies I’ve spoken to that are in a tough environment because they painted themselves into a corner because of their fundraising history and valuation,” Rachel ten Brink, a general partner at pre-seed-focused Red Bike Capital, told TechCrunch. “They started in 2017 and raised at 100x revenue. It’s a SaaS company; what are they doing from here?”
But now that funding isn’t as easy to come by, early-stage founders may have the opportunity to avoid some of those pitfalls.
For ten Brink and other early-stage investors TechCrunch spoke to, this tougher fundraising environment will prove to be a good thing for many young startups, creating companies that rely less on venture funding and more on organic growth.
“The DNA of companies does shift when you are born of this time,” ten Brink said. “This great recession of startups, it absolutely shifts their perspective and how they are built and set up form the beginning.”
Maëlle Gavet, the CEO of startup accelerator Techstars, told TechCrunch that while the program’s guidance has always been centered around telling companies to build businesses that rely as little as possible on venture capital, with a less stable fundraising environment, maybe they’ll start to listen.
“We push them to start thinking about what a long-term financially sustainable business looks like, and if the answer is, ‘I need to fundraise every year or do 150% growth each year for the next five years,’ we sit down with them and say, ‘Hey, that is probably not a great business model,'” Gavet said. “I’ve heard so many times, companies saying, ‘Oh, I just want to build a unicorn.’ No, no, no, let’s talk about that.”
Ten Brink agreed, adding that in an environment where investors are pickier about where they put their money, startups will need to have a solid business model to even raise capital. Companies won’t just be able to raise on an idea anymore.
“If you don’t have a real business, you won’t get funded,” she said. “It forces you to be hyperfocused on the type of business you are building, and the business model is a big piece of it.”
Companies that raise less VC — and therefore likely have a leaner balance sheet — will be less tempted to overhire, a trend more mature startups used their big VC reserves to lean into, which has now resulted in numerous layoffs.
“How do you build resilient teams? How do you build scrappy teams? That is very much in founders’ minds these days because they know that they are not going to be able to go back and get more money,” ten Brink said.
For Kirby Winfield, the founding general partner at Ascend, it’s more specific. He hopes companies raising less money will be less tempted to spend on sales teams too early.
“Startups will be more thoughtful about founder-led sales,” he said. “One of the biggest things that happened in the last cycle was businesses were hiring sales leaders way too fast because they had the money to do so. Some of the most successful SaaS companies have founder-led sales through the Series A.”
The current environment will also hopefully produce startups that more thoroughly scrutinize the funding they are able to raise. Gavet said that now that startups have had their eyes opened to how hard it might be to raise their next round, they will hopefully spend more time analyzing the funding and valuation that does get offered to them.
“The right thing from a business perspective is you need to ask yourself if that is a good deal to make,” Gavet said.
Of course, while the startups that do raise in this environment might be better off, those that can’t secure capital will struggle more than in recent years, leading to more company shutdowns in 2023 than in 2022. Women and founders of color may have an even harder time than their peers in the current environment as VCs practice a “flight to quality.”
But those who are early enough to be able to adjust their business model to reflect the current fundraising environment and plan for a future that relies less on venture capital will likely be better off in the long run.
“Constraints breed creativity,” ten Brink said. “When you don’t have a lot of options, you just get really creative. When you can’t throw money at a problem, you get really creative.”