One of the biggest challenges in a startup's lifecycle is funding. Because besides the lack of experience an entrepreneur may have, the venture capital market has its ups and downs, leaving barely any room for companies to overcome this situation.
Financial markets move at their own pace and are very volatile, and early-stage ventures are the most impacted by these downturns, as they are the riskiest ones. Not so long ago, the VC sector was pumping large amounts of money worldwide. It seemed the sky was not the limit at all for funding companies.
But things have slowed down, and with the current economic uncertainties globally, the venture capital sector seems to be under a deep freeze. With that said, many funders and business owners expect a market correction, given the current trends.
Moreover, investors see an excellent opportunity for startups to thrive. How can it be possible that an economic recession will help a company succeed? According to the experts, these downturns can improve the ecosystem by building better leaders.
Just like the old quote " a quiet sea never made a skilled sailor," an economic crisis can be the brave sea entrepreneurs need to grow stronger. That said, there's no secret sauce or easy road to success, but there's a way to tackle adversity while the financial markets reorganize and not die trying.
Startups And The Venture Capital Landscape
According to Crunchbase, the current economic recession is the third most significant tech downturn of the internet era, following the dot-com bubble and the Great Recession. This economic uncertainty is hitting everyone, but early-stage ventures are certainly experiencing the biggest venture capital retraction.
As a result, investors strive to minimize risks and be more cautious by choosing companies with a proven business model to pour capital into. Unfortunately, startups in earlier stages present a more uncertain scenario, and without this proven business model, they are based only on a good idea. Not enticing at all for venture capitalists during a global economic downturn.
But startups need funding to improve their businesses' technologies and products and get the right people on board. Therefore, founders can't afford to miss a funding opportunity. Though entrepreneurs know that challenges are part of any business journey, the fundraising slowdown is indeed critical. However, before this financial turbulence, deals hit record-breaking numbers in 2021 until, unfortunately, they drastically dropped in the first quarter of 2022 due to a combination of factors like the war in Ukraine, the rising economic recession, and high inflation rates. This made a dramatic shift in the startup ecosystem.
In such a volatile context, companies must be set in survival mode to use the crisis as an opportunity to be more profitable. There's still a lot of uncertainty, and though experts are forecasting an economic recovery, startups should buckle up and follow the advice of those who have already been there.
Related Read: How To Lead Your Startup During Uncertain Times
Venture Capital Is Slowing Down. So, Now What?
Despite the rough funding climate, startups across a wide range of industries pop up every day. But unfortunately, not all of them succeed, and most sink before the first five years, whether there's an economic debacle or not. Therefore, we have put together a list to survive not only the current capital freeze but also any financial crisis along a startup lifecycle.
How To Survive The Venture Capital Freeze
As we said, there isn't a recipe for succeeding during rough financial times. However, founders can optimize their resources, increasing the chances of thriving during turbulent periods. Though no two companies are the same, these three key takeaways we have put together can help you minimize the consequences of this fundraising winter.
Be Open To Pivot
Among the numerous reasons why startups fail, it's overconfident founders. Everyone thinks they have a groundbreaking idea, but it's the market that will validate it or not. Unfortunately, sometimes startup execs stick to their idea and refuse to pivot and make a shift on their initial conception. By doing this, chances are the product doesn't find its market fit, and as a consequence, money runs out on holding on to an unprofitable idea.
Startups cannot afford a poor cash flow during a venture capital downturn and will certainly not survive. Determining when it's the right time to pivot and introducing changes to your product is key to increasing your chances of thriving in a challenging context.
Keep Investors Informed
If you are lucky enough to have already secured a funding round, it's vital to keep investors informed regularly. This is important to build a relationship based on trust that can open doors for future funding rounds when scaling your business.
Moreover, you should include not only the goods but also the rough patches. Yes, investors must have the whole picture regardless of how bad it is. The funders community is vast but pretty tight-knit. Therefore, you must always keep communication open with your investors, even if they are not investing in the next round.
Invest In Hiring The Right Talent
Having the right people on board is key to survival during challenging times. So, yes, you must invest in hiring the best talent because it'll pay off in the long run, and mostly in contexts of uncertainty. A proficient team can help founders improve decision-making regarding product development and pivoting and also help determine the right path to follow when a financial crisis hits. Don't cut costs when assembling your initial team; you'll see the results while navigating turbulent waters.
Parting Thoughts
Funding is vital for the scalability of any startup. Companies need this fuel to make decisions and introduce the necessary improvements to develop a successful product. Many investors and execs who have already been there and thrived in rough contexts are giving entrepreneurs their advice to help them make the right moves during uncertain times.
However, despite the global economic flows, Latin American startup founders watch the US market as a green field for their businesses to flourish. Programs like Base Miami's Market Fit give entrepreneurs the tools and resources to understand how the market behaves while getting valuable insights from those who have been where you are. Get in touch with us today and take your business to the next level!
