Cybersecurity startup funding is down, Fintech has left the top three funding areas, and AI funding has slowed considerably. Raising money for a startup has always been difficult. Yet, venture funding has dried up significantly over the past year, especially for later-stage companies. Consequently, startups are running out of money, and once-proclaimed unicorns are being sold off for a fraction of last year’s valuation or going into liquidation. Thus, let us look at the issues behind the current funding crisis and what to do as a board member before companies reach the point.
Interest Rates and The Cost of Funding
The biggest reason for the funding crunch is the interest rate. With the Federal Reserve raising the interest rates, borrowing has become much more expensive. At the same time, the money available on government bonds becomes more attractive. Thus, a startup must promise an exceptionally high valuation or very low risks to compete with the opportunity costs of not investing in bonds.
The past interest rates also influence our perception. Interest rates were meager over the past couple of years, and thus, investing in startups vs bonds was a lot more attractive. Consequently, many companies got a significant infusion of cash.
Uncertainty in the Economy
Coupled with the interest rates is the economic uncertainty. Deciding what to do with money is much easier if you know what the economy is doing. It doesn’t have to be a good outlook. Predictability is critical.
Right now, many Angels and VCs sit on their cash, fearing they might need to provide lifelines to existing portfolio companies.
A Sudden Boom in AI Funding
Yet, the boom in AI and the associated funding has hidden the broader issues in venture funding. Many believed the party would continue with AI valuations and financing rounds increasing. Yet, even in AI, venture capital is starting to pull back. Significantly, economic uncertainty is also beginning to affect raises in AI. Regardless of the general market’s direction, 2024 might see AI funding getting closer to the broader venture capital market.
Board Action: Product Before Pitch
When determining the 2024 and near-term strategy, boards shouldn’t expect a new waiver of venture capital. Instead, products and profitability should remain the focus. After all, a profitable company can continue operating, even in a problematic market.
Consequently, the strategy should ensure companies build and sell viable products. Before the boom in venture funding just before and during COVID-19, an MVP and successful sales were the hallmarks of reaching the seed stage. While the checks might stay the same size as last year’s, we are getting back to this requirement.
Thus, a product and sales funnel will remain required for corporate triumph and successful pitches.
Board Action: Network long before needing Funding
Board members have long contributed to the success of the subsequent raises. Our networks can open doors and get founders and CEOs in front of venture capitalists. Yet, the combination of easy money and the COVID lockdowns have reduced the number of networking events and how many of those we attend. Yet, networking does work if you only do it when raising funds. Networking is a trust-building exercise that requires long-term engagement and communication. We should all get back into the habit of broadening and strengthening our networks before asking for favors.
Board Action: Push for Investor Engagement
Yet, the best network for any founder is with the previous investors. They have already committed to funds for the venture and believe in the vision and mission. Yet, for many startups, investor newsletter and engagement is an afterthought. Lead investors and investor board members should know better. Most of us aren’t always in the lead and have experienced the frustration of not hearing anything from companies in our portfolios. We should push for better engagement of existing investors. It strengthens the connection between a company and its supporters and shows the next round of investors a culture of openness and respect.
On a personal level, it also strengthens the credentials of investor board members and leads investors. Suppose we are known for keeping our fellow investors engaged with the companies. In that case, we can open up new opportunities for ourselves when looking to fund the next startup and find investors to commit funding alongside us.
Don’t let a Funding Crunch become a Crisis.
The previous five years have been flush with venture capital. Sometimes, to the point that early-stage investors have skimped on due diligence and survivability questions. The current funding crunch has shown that far too many companies require constant funding instead of using funding for scaling from success to success. Lead investors and board members have to reign in the drive to go from funding to funding and ensure that companies select strategies that enable them to survive, even if the next round of venture capital is coming later or not at all. Building successful companies, strengthening networks, and showing results to current investors can go a long way when trying to find the next financing round.