There’s plenty of doom and gloom about the availability of capital at the moment. Right across the tech landscape from seed-round startups to listed tech companies, founders are feeling the brunt of a dramatic shift in sentiment thanks to the high-interest rate environment.
But while much of the commentary seems to label this as an unusually tough and unfair market – at least in the opinion of those trying to get their hands on funding – for those holding the purse strings, this is simply a return to normal.
That was the message from Casey Flint, Senior Associate at Square Peg Ventures speaking at Startup Daily’s recent Ask Me Anything event, with AWS, in Sydney, where VCs, founders and friends in the startup and scaleup community got to ask the experts all their burning questions across a series of panels.
“It feels like the market’s plummeting, but actually we feel like this is a return to how things actually should be,” Casey said.
While the The Good, The Bad and The Runaway panel was centred around capital and runways, the audience questions instantly gravitated to asking, “where is the money and how do I secure it?” And the responses from the experts were a mixed bag of encouragement and brutal reality check.
“I think there’s the most amount of dry capital that we’ve ever had in Australia,” said Isabella Rich from OIF Ventures’ Investment team. “But I have empathy for founders because over the past five years we’ve operated in an environment of not normalised growth-at-all-costs, and it’s been a very sharp change of regime to profitability and growth.”
John Kearney from AWS agrees that the opportunities still exist for good businesses, but it’s not going to be as easy as it was previously.
“If you’ve got a good product market fit, a good founding team, some traction, you can get access to capital. The terms may not be exactly what you want, but there’s definitely opportunity.”
Casey Flint illustrated this point with a story about SEEK co-founder Paul Bassat’s fundraising. After founding the business in 1997 he did a fundraise in 2001 at $100M valuation. A few years later – and post dot com crash – he raised again at the same $100M valuation despite having achieved 40 x growth in the business. “It was purely a reflection of the market, but he kept persevering knowing he was building a generational business.”
When looking at what exactly has changed in the approach investors are taking, the panel had three key areas that must be taken into account.
1. We’re (back) in the age of profitability
Does the business have a path towards profitability? Is there a sound commercial model in place that will make money, rather than churn through capital for pure growth?
Isabella Rich pointed to a recent Morgan Stanley tech conference that sums up this shift in mindset. “They surveyed the room of all investors, and there were three options. Would you prefer an investment of 40 per cent growth and 0 per cent profitability, another was 50 per cent growth but losing 10 per cent, and another was 30 per cent growth but profitable. And the unanimous decision in the room was 30 per cent growth, 10 per cent profitability,” she shared.
2. Growth is not suddenly a dirty word
At the end of the day, venture capital is about high growth businesses, not simply profitable businesses.
“I see a lot of pitch decks at the moment where it’s like, ‘We’re driving towards profitability in the next year and we’re really focused on profitable growth’, Casey shared. “And I’m thinking, well I know you’re just responding to what VCs are telling you they want, but also they really want growth. So don’t forget that it’s important to grow and to find that balance.”
3. Efficiency is just as important
While most of the attention naturally goes to the making-money side of the equation, the less sexy side of capital raising is how to build in efficiencies. In a high inflation, possibly recessionary environment, not only is capital more stringent but revenue is impacted as businesses and consumers across all sectors reduce spend. Efficiency is key to not only extending runway but also providing some cushioning from the hit that revenue may take.
For a global business like AWS, you may think that the prospect of their customer base reducing spend would be a serious concern. But surprisingly, John explained how helping customers become leaner and spend less on their tech infrastructure is already a core objective.
“We have different programs that we use to try and help extend our customers’ runway. We have a solutions architecture team that spends maybe a third of their time optimising our customers’ environment to make it cheaper for them to run. One of the KPIs on my team is to reduce our customers’ bill. That’s how they’re measured.”
After a busy hour of questions and answers, the Runway panel had a clear message to share: yes, the market is still open for business, for exceptional founders with a great business who can tell a compelling story that balances efficient growth with profitability.
Just don’t expect it to be easy going.
This article is brought to you by Startup Daily with AWS.