Russ Heddleston
Founding a company during economic uncertainty and excelling takes more than just a hungry founder with a good idea. It requires a solid foundation to withstand the market. Companies founded today must focus on becoming profitable while growing, which is only sometimes a priority for companies receiving aggressive VC funding. In the pre-revenue stage, profitability has sometimes been top of mind, but keeping operations efficient and focused is vital for maximizing the potential for monetization.
Investors are engaging with fewer pitch decks from founders, according to DocSend data — investor activity dropped less than 2% year-over-year (YoY) from 2022 and 4% from 2021. However, investors are still reviewing pitch decks at a higher clip than 2020, proving there’s a market for early-stage deals, even though funding was down 27% YoY in Q3.
Every market has its opportunities and challenges. Just a few years ago, a founder’s market led to “zombie” companies raising money at unrealistic valuations with a “growth at all costs” mindset, proving there are pitfalls even in a highly founder-friendly market.
Now that investors have pulled back to level-set, founders need to prove their company is built to last with long-term profitability and scalability in mind. Historically, this follows suit with Big Tech companies like Google, Microsoft, and Adobe, which were all at or near profitability when they went public.
Instilling solid building blocks for the company’s foundation is even more critical in a tighter economy and investor’s market. Some of the most innovative companies in the world were started during economically challenging situations, and those companies were built to withstand the market they were entering.
The next generation of companies that define the market will operate with the same integrity. A strong foundation helps raise early-stage capital and will help the company scale when appropriate and reach further stages of its life cycle. In the days of growth at all costs, being profitable or keeping an eye on unit economics were often ignored or disdained. That has now clearly changed. For founders now, perfecting the pitch, having an efficient sales strategy, and scoping the product with urgency will create a strong foundation for success that attracts investors.
Give investors what they’re looking for
The startup ecosystem is fluid and adapts to the times. Investors may have niche preferences such as specific industries, interests, or social causes that resonate for personal reasons. In speaking to your prospective investor, you should study their personal drivers alongside the overarching marketplace.
Investors are quick to walk away from a deal that doesn’t catch their eye immediately — time spent reviewing decks continues to go down, and even more so for decks that don’t resonate quickly. Prioritizing quality over quantity in investor outreach and being intentional with building relationships creates trust, leading to greater mutual understanding and more beneficial interactions. Vetting investors for aligned goals is helpful for both founders and investors.
Ultimately, the overarching trends reflect a market need, such as the widespread popularity of artificial intelligence (AI) and the move to SaaS prior to that. AI-related seed pitch decks jumped 48% in 2023, according to DocSend’s Seed report, as founders responded to the market and consequently flooded it. Investors need to see how one specific company can cut through that noise, spending 88% more time reviewing the competition slide of successful seed pitch decks. It’s not a one-horse race; this slide is an opportunity for proof points.
Strike while the iron is hot and execute a well-timed outreach. A substantial “Why now?” section demonstrates market urgency at a time when investors are prone to skipping on deals. These two sections can efficiently communicate why a startup is worth the money despite the economy and crowded marketplace.
A lot can be gleaned from interactions with investors. Lack of positive engagement is still a learning opportunity. Remaining flexible and constantly reassessing and adjusting fundraising strategies helps build a stronger pitch. The legwork done in creating an initial relationship should hopefully lead to helpful feedback that can be applied even if a deal isn’t made.
However, not all feedback is delivered verbally — investor actions often speak louder than words. How they engage with certain aspects of a pitch deck can illuminate an investor’s actual opinion, just as disengaging entirely is a glaring no. In today’s market, investor interest and time are at a premium, indicated by a weekly all-time low in investor time spent reviewing pitch decks during Q4 2023. Founders must gain insight from each interaction with their pitch deck and effectively understand limited feedback.
Sales strategy: Prioritize efficiency with fewer resources
Early on, profitability revolves around making the most out of what you have. As early as pre-seed, investors now spend 60% more time reviewing a company’s profitability section, so founders need to showcase sustainable growth early on.
While new resources are limited, it’s best to tap existing ones. A recent report from Crossbeam and Pavilion found that 89% of business leaders are changing their sales strategy and moving away from sales-led growth to lean more into their ecosystem. Consider skipping a sales team early on and looking within. Founder-led sales before hiring a complete staff utilize the resources at hand, allowing other priorities to come before building a sales team.
A founder can be the best salesperson to present their product to investors and potential customers, though the approach is different. There’s no substitute for doing it yourself to start learning what does and doesn’t work with sales. It’s better to do a poor job of sales yourself at first to learn quickly rather than hire an expensive “expert” and hope for the best.
Adopting a do-it-yourself-first sales strategy can also help with more in-depth insights into customer pain points and lead to important discoveries that may need to be noticed or overlooked by a sales team. At the earliest stages, analyzing feedback for potential problems and addressing them on a small scale is essential for future scalability, so enhancing a founder’s visibility into this process can be invaluable.
This approach can be beneficial for limiting operating costs and keeping the business as capital-efficient as possible. It can also help grow the customer-facing offering organically, using a founder’s network and reach to their advantage.
Finding your end user before they find you
Most products or solutions are built with a target customer in mind. Scoping a product and accessing that customer base as soon as possible optimizes efficiency. The quicker the target user is identified, the quicker the product can be monetized and profitable. Even if it means waiting to scale the product fully, founders can enable some cash flow through product revenue during initial challenging times.
Understanding the timeline to scaling and including the customers who align with the timeline’s goals enables some foundational financial security. Founders are even launching products earlier on. However, this doesn’t mean founders should rush a product to market and customers. A product that flops in the hands of its target user at any level loses trust and, in turn, jeopardizes future business opportunities. Investors will use data to qualify for a good business opportunity, and transparency helps build trust.
Founders must be realistic with their go-to-market strategy and analyze whether scoping their product fits that strategy, as each startup is unique. Bringing a product to market is a central proving point, so embracing a fluid process ensures that the company does what’s best for survival and success. Over time, the product may evolve to fit additional customer bases better, but ensuring some cash flow at an early stage is critical for founders seeking funding in the immediate future. Throughout the process, demonstrating viability beyond the product is a requirement now. Showing early signs of adoption or engagement backed by data stands out.
There will be founders who fail in 2023, but there will also be founders who succeed in ushering in the companies that define a generation. It’s easy to become pessimistic about macroeconomic factors and investors saving up dry powder, but the silver lining is that this market will force founders to build something lasting. Google, Microsoft, and Adobe were all at or near profitability when they went public, so there are historical precedents for prioritizing monetization earlier than the norm in the last few years. Founders who succeed in today’s market will address significant business challenges early in the company’s lifetime, leading the way for a profitable and scalable venture for years to come.
There is a wealth of untapped VC capital in today’s market. The next set of successful founders will be those who build their companies with a focus on their foundation and understanding what each investor is looking for today.
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