By Alton McDowell, Co-Head Technology and Disruptive Commerce, Middle Market Banking & Specialized Industries, J.P. Morgan Commercial Banking
From ongoing concerns around inflation to worries about a recession, investors, like many of us, are operating with an added layer of caution and diligence. Generous valuations and high-potential ideas are no longer enough. Investors want to see one thing: profitability.
As a result, many founders will need to recalibrate their approach to securing capital. Instead of dedicating hours to a glossy pitch deck, I encourage founders to root themselves in data and deep market understanding to show investors that they are ready for anything 2023 may throw their way. Whether working toward their series B or considering an IPO, founders will need to show profitability, hone their market strategies and carefully navigate economic pressures in order to succeed.
Chart a Path to Profitability
In today’s environment, profitability beats potential.
Investors want to clearly see market opportunity, product fit and proven performance. If a company is not currently profitable, it had better at least be well on its way.
Showing, not telling, their profitability story should be founders’ North Star during investor conversations. For some, that means now is not the time to rush a product or service to market. Focus on thorough testing and sample selection to ensure a Minimum Viable Product (MVP) will perform at or above expectations. Founders should also assess whether they need to adapt their business approach so they are driving incremental profit from each sale.
Next, founders must have a complete understanding of how profitable their business could be—plus have the data to back it up. Rigorously evaluate opportunities, such as new markets and products, and then determine the fully loaded associated costs for each. Backing up big ideas with research will go a long way.
Hone Your Market Strategy
To that end, a market strategy grounded in facts and reality is essential on the path to profitability. Just as I advise founders not to rush a product to market, I would caution them from entering a new geography – whether local or abroad – without first doing careful market research and testing.
For some, this begins with getting a deeper understanding of their immediate geography and neighboring markets. For others, it’s evaluating if now is the right time to expand internationally. Before taking action, founders should ask themselves, and their teams, some critical questions:
- Who is the specific audience they are targeting in this area? How does that group compare to their current customer base?
- What competitors do they have in this new market? How loyal is their competitor’s customer base? What makes their offering different?
- Why do they need to move into this market now? Is the opportunity only temporary?
Founders eyeing opportunities abroad are likely to encounter markets that, similar to the U.S., are bracing for a potential recession. They’ll also have to navigate fluctuating currencies and labor markets, impacting their ability to invest in in-market infrastructure and increasing their need to work with locally based third parties. Founders can benefit from working with an institutional partner who brings a deep understanding of their business and the markets in which they currently operate, as well as insights into broader geographic trends and opportunities.
Understand Macro Pressures
No business can outgrow the economy. No matter its size or specialization, every business will, at one time or another, be forced to reckon with economic forces beyond its control. In an uncertain environment like we are in today, investors take a more critical view of every pitch they hear and every dollar they allocate.
Consequently, founders need a solid understanding of the trickle-down effect of broad economic forces, including fiscal policy, consumer spending, employment trends and inflation. It’s critical to identify and understand which factors are most likely to impact their business and the actions they need to take as a result.
For example, investors will be closely watching how the Fed continues to battle inflation by raising interest rates. How does a rising rate environment impact their operations? Does it have balance sheet implications? How does this impact their customers?
Founders should be prepared with insights and supporting data for what the economic climate means for their business. In particular, it helps to show actions they have already taken to safeguard their operations. For instance, many founders have found workarounds to lock in prices on inventory to offset inflation and future rate hikes.
Once again, having a strong financial partner with market, economic and industry expertise can go a long way in understanding, navigating and developing a strategy for tackling these types of issues. Armed with knowledge of economic trends and their potential business impacts, founders can position themselves for growth and avoid being caught flat footed in front of investors.
Looking Ahead for 2023
The next year will undoubtedly present founders with opportunities to grow and expand, but also challenge them with new risks and obstacles.
If there’s one thing I know for certain, it’s that founders are gritty, resourceful and aren’t afraid to lean into challenges. By maintaining their focus on profitability, doing the homework to fully understand market opportunities and grounding themselves in economic facts and data, founders can set themselves up for success in 2023.