This week on the startup to scaleup journey:
Global VC funding drops again in May
Global venture funding reached $39 billion in May, according to Crunchbase data. This was a 14% month-over-month drop from $45 billion in April and a 20% decline from the $49 billion invested a year earlier in May 2021. This is the first month in more than a year where funding has dropped below the $40 billion mark. The May figure is also well below the $70 billion peak VC funding reached in November 2021. The largest pullback was in late-stage venture capital, which fell from 2021 monthly averages by close to 40%. Here, VCs globally spent $22.3 billion, down from the 2021 monthly average of $36.2 billion. Early stage (typically Series A & B) has not been immune from pullback either: funding reached $13.7 billion globally last month, down 22% from the average monthly funding in 2021 of $17.6 billion.
Yet in the face of significant market headwinds, Seed stage has proved remarkably resilient. Here, $3.1 billion was invested globally in May, increasing 11% from the average $2.8 billion invested monthly at Seed in 2021. Investing in this more formative stage presents an opportunity for longer-term valuation growth. For some investors, this could counterbalance the valuation depression underway for later-stage businesses. Some of the largest growth funds have been showing increasing interest in earlier-stage companies. The roster of deal activity by the leading global funds shows that whilst the absolute amount of capital being deployed is being heavily reined back, the number of deals being done by some is increasing. For example, Tiger Global, the hedge fund and PE powerhouse, shifted down heavily to Series A deals during May. As a result, Tiger's deal count year to date is up 88% compared to the same period in 2021, whilst capital flow is down 13%.
Founders currently raising Seed rounds have room for optimism provided they understand that the diligence bar has been raised compared to 2021. They must present with stronger credentials and central to this is demonstrating a higher degree of financial rigour. This increasingly looks more akin to that needed for Series A deals back in 2019. Most importantly, this includes well-validated short-term forecasts that will continue to successfully convert during the funding campaign. And beyond top-line revenue growth, investors want to see increasing sales efficiency, solid unit economics, leading KPIs trending positively, and a plan to grow in an efficient way. This must all underpin a well-constructed financial model that can easily be stress-tested: Investors will expect to see a strong degree of cash resilience (post investment) should the macro-economic climate chill further.
The interesting people fund
The Startup of You has become a highly acclaimed playbook for entrepreneurs. Written by Reid Hoffman (co-founder of LinkedIn and now a VC) and Ben Casnocha (entrepreneur, author, and VC), the book argues that we can no longer expect to find a job, instead we must make our jobs. As Hoffman says, we have to “find a way to add value in a way no one else can. For entrepreneurs, it’s differentiate or die — that now goes for all of us." One of the most fascinating topics in the book is the idea of an 'interesting people fund', where entrepreneurs are encouraged to set aside time and money in advance to keep their networks up to date. This is a 'pre-commitment strategy': by pre-committing time and money to meeting interesting people, you increase the likelihood that you actually do it. This is a timely reminder. Over the past 2 years, many of the networking opportunities that we took for granted before the pandemic all but disappeared. Now we must make a conscious effort to connect.
A founder's network eventually becomes their power tool. It is the most vital intangible asset on the personal balance sheet. It helps accelerate insight, open doors, and foster collaboration. But the power of the network is a function of the trust that has been developed within it, not the scale of the network itself: When asking someone to take a risk on your behalf, if there is little trust, there is little action. Nowhere is this more important than in the founder/investor relationship. This is not so much about the relationship between two businesses but the relationship between two people. Serial founders place their network at the top of their asset register. In each new round of funding, being able to leverage investor relationships developed over many months and years confers huge advantage. This may sound obvious, but many founders have slipped out of this habit in recent times. In this period of re-engagement, we should all be topping up our interesting people fund.
Hoffman and Casnotcha say that every opportunity is attached to a person. "Opportunities do not float like clouds in the sky. They’re attached to people. If you’re looking for an opportunity — including one that has a financial payoff — you’re really looking for a person." Some founders, especially first-time founders, don't always have the presence of mind to reach out to a senior person that could make the difference. But the title 'Founder & CEO' counts for something. It's a door opener in itself and with that calling card almost anybody will give you a shot at saying your piece. But don't destroy this privilege by initially asking for help. Create trust by first giving something - your own insights, your own network, your own time. As a former mentor of mine would say, plan on giving 80% of what you know away. Eventually, you will be able to harvest great value in the 20% you retain.
Hiring the right growth execs
As venture capital flowed into startups at historic rates during 2021, there was a frenzy of hiring activity to build out growth teams. Execs with early scaling experience were in ever greater demand (and still are). The competition for the best people put founders and hiring managers under pressure to move very quickly on candidates - and mistakes were inevitably made. Some founders can now see signs of poor role fit as new hires become fully operational. Whilst the journey to product/market fit is highly experimental and iterative, early scaling typically requires the rapid planning and execution of a land-grab strategy. At this critical juncture, new growth execs should spare no time in setting and then delivering on aggressive goals, managing the transition from the 'wild west' of the early startup to a professional operating business.
The first signs of failure are execs that either shy away from setting such goals or find excuses for not attaining them. This is easy to spot, but there are other slower-burn issues that can have even greater impact on future growth prospects. The first warning sign is that as the CEO you are still heavily involved in the role you actually hired for. As veteran VC Elad Gil says in his excellent blog on the subject, "The whole point of hiring executives is to have people who are stronger than you take over a function, or so that you can delegate major items and expect them to be done well. If you are constantly being pulled in to help a function or to cover for an executive, it means they are in over their head." The right hires bring their playbook and adapt it quickly to the business. For example, your new VP Sales will relieve you from pipeline development, building and pitching the proposition, and negotiating terms. If you are still doing this, ask why.
In the current market, founders are understandably worried about the costs and risks of bringing on new people, even if they are highly motivated to do so. This may mean more regulation of the hiring plan, putting even greater pressure on the current team to run leaner for longer. With so much macroeconomic uncertainty, many org charts are currently being re-mapped and for many founders this is a moment to re-evaluate what sort of hires make sense for the next phase of the journey. VC, Gil Dibner, in his recent blog on building the commercial team, says a person’s entrepreneurial DNA matters more than their previous titles, previous successes, or experience. "Focus on the deeper DNA you are bringing into the organization. There is no single “right” hire or pre-ordained hiring strategy - there is just the right DNA - and you should create as many options to bring that DNA into your organization as possible." Great advice for uncertain times.