During a recent panel session moderated by Slaughter and May for late-stage UK start-ups, titled ‘Fundraising during rockier times’, we came away feeling a bit more positive about the ‘rockier times’ than we might have been before. If you are a tech start-up, or your organisation invests or helps develop them, you may have been concerned by the recent drop in valuations and investment opportunities, and there is no denying that, after the intense levels of investment over recent years, the availability of funding and valuations have both come off and will, in general continue to do so. What gives us cause for some optimism though is that it was clear that there are real opportunities if companies focus on strong fundamentals and what really matters and properly showcase themselves to investors. Find below six takeaways we took from this session:
- Trust in existing relationships – Your early investors will likely have the confidence in your underlying fundamentals, and you as a team, and so these relationships matter and in times when deploying capital is much more scrutinised, funds need even more conviction that founders can execute their vision. Clear and honest communications during tougher times should help keep your existing investor relationships strong. We are seeing investors focusing their capital on existing investments in a lot of cases rather than seeking new ones.
- Different Types of investors will come to the fore, but traditional VCs will remain active - specialist sector investors and larger corporate-backed venture arms will likely become more significant players (for instance Google Ventures is set to hire at least one new partner in London and is preparing to make more investments in Europe) but traditional VC funds are also still sat on a lot of dry powder and it’s their business to invest. Crowdfunding is likely to be trickier in a cost-of-living squeeze, but possibilities remain and if anything, it is a useful marketing tool as well as capital source.
- Minimise burn rate - especially if you’re not yet profitable. Investors inevitably pivot away from revenue growth more to a focus on profitability and cashflow in times like this (which, as one of our panellists pointed out, isn’t necessarily a bad thing). So take a close look at how many months you have left before your funding runs out, make modest to moderate reductions in your burn rate to increase your available runway, and be investment-ready when you need to be.
- Valuations may simply be returning to normal - in the UK, company valuation has, historically, been 6 to 15 times your revenue (the US significantly more). The multiples will obviously come back down again to where they were before, possibly less: maybe 5 to 8 times. Or valuations may be more focused on profit/cash flow. You may need to work harder in the coming months to justify your valuation, but if your fundamentals are there you should be able to achieve market norms.
- You don’t necessarily need to delay fundraising - move forward if you need to fundraise, in the knowledge that the funds will generate growth and you shouldn’t stall the progress of your company. Be clear in what you want to build and be clear how much capital you need to achieve your vision, and then keep looking for the right investor to help you achieve this vision.
- Exit plans – should not be impacted conceptually although may take longer - your vision should remain a long term one. We have seen some exits via distressed M&A already, but this feels a little panicky.
Slaughter and May’s Venture Capital practice advises the full spectrum of investors, from early-stage venture funds to large, international VC firms and institutional investors. Additionally, our Growth Companies practice advises companies throughout the cycle, from start-ups to large public and private companies around the globe. For more information, please see our website and/or contact James Cook, co-Head of Fintech and Emerging Tech.