Navigating the New Norm
Strategies for startups in a cooled investment climate.
Fundraising tides have changed. Startups are experiencing heightened investor expectations at each capital-raising stage, widening valuation gaps between what they’re seeking and what investors are willing to offer, and greater investor caution resulting in a preference for “down the fairway” investments over untested business models.
The bottom line? Capital is scarce, and this recalibration signals a return to a more discerning market. To help startups navigate these complex waters – to swim rather than sink – we’re here to share some advice distilled from the minds of Deciens’ investment partners.
Our Advice to Entrepreneurs
Prioritize hedging out financial risk:
Dan Kimerling, founder and managing partner, offers an insightful mental model for startups: to view their company as a complex risk management problem. When prioritizing risks, especially existential ones, financing risk should be at or near the top. And the greatest risk in this new economic reality is dependency on external financing.
“In the current climate, it is better to double profitably than try to grow 3-5x and consume cash,” says Kimerling. He advocates making capital-raising a strategic choice rather than a necessity, enabling founders to negotiate from a position of strength and on favorable terms.
Create a core business with solid unit economics:
Expanding on the previous point, Vishal Rana, portfolio and operations partner, counsels startups to prioritize creating a core business with solid unit economics, even if it means growing more slowly than originally planned. “This may seem antithetical to venture capital return profiles, but surviving the next couple of years will take a different approach,” says Rana. “Having a solid core to fall back on can mean the difference between surviving and extinction in this change in era.”
Creating strong unit economics could entail streamlining operations to improve efficiency, reducing operating costs wherever possible, renegotiating contracts with suppliers, analyzing and adjusting your pricing strategy, reducing your customer acquisition costs…and the list goes on.
Diversify your capital sources:
The path to venture funding has narrowed, but it remains open for startups that can demonstrate strong growth, healthy unit economics, compelling business models, and large market potential. “There is a lot of capital chasing the limited number of companies that are a fit for their new investment frameworks,” notes Ishan Sachdev, general partner.
However, Sachdev advises companies that don’t fit this criteria take the hard step of thinking about an alternate path forward — whether that’s achieving profitability or exploring alternative funding sources beyond traditional venture capital. Kimerling adds, "Get comfortable looking at a broader set of capital sources, including strategic partners, competitors, angel investors, and family offices.” Adapting to different investor expectations and navigating more complex deal structures are crucial skills in this new funding ecosystem.
Adjust your approach based on size and context:
Small companies, like small boats, are more maneuverable. Agility is your advantage. If you’re a smaller company, you can adapt quicker, reduce costs faster, and pivot easier than larger entities. Focus on slowly increasing revenues over escalating costs, which preserves cash and extends your financial runway.
Larger startups, like larger ships, face greater challenges in shifting directions quickly. Strategic long-term planning and gradual adaptation to market changes are essential. Larger companies must weigh significant trade-offs and make tough decisions to sustain operations and position themselves for eventual success.
Embrace flexibility and adaptability:
“If there is one thing we advise, it is the importance of flexibility and adaptability,” says Kimerling. All startups should integrate flexibility into their operational strategy. The ability to adapt to changing circumstances can mean the difference between thriving and failing in the current economic climate. This includes being prepared for shifts in investor sentiment, market dynamics, and economic conditions.
A Balanced Approach to Sustainable Growth
In this new era of startup financing, success requires a balanced approach to growth, risk management, and funding. By diversifying funding sources, focusing on strong unit economics, and maintaining operational flexibility, startups can navigate the complexities of today's market.
Remember, survival is the prerequisite for greatness, and building a resilient, adaptable business is key to long-term success.
