This is how you survive the VC winter, according to US venture capital leader EY
After a record 2021, the venture capital market has slowed this year and is likely to remain cool in 2023 due to inflation, rising interest rates and geopolitical uncertainties.
But the news isn’t all grumpy.
Despite volatile market conditions, 2022 is already the year for the second highest venture capital investment on record. Total investments are expected to hit the $200 billion mark for the second straight year, making this year the fifth consecutive year of total investments exceeding $100 billion, according to our analysis of Crunchbase data. Also this year, venture capitalists raised $151 billion for new venture funds in just three quarters, meaning record amounts of capital are sitting on the sidelines to fund further innovation. In fact, according to the trend, 2022 will be the fifth consecutive year of record-breaking fund creation results.
Three ways to stand out
In this environment, where recessionary pressures and inflation meet elevated levels of capital looking for investment, how do you determine if your company is a viable candidate for funding? When reviewing recent entrepreneurial success stories, here are three keys that stand out:
Your company should be indispensable, not arbitrary
Consumers and businesses are struggling to navigate a collapsing economy. Can your company help? When your company provides a tool, platform, or service that helps customers streamline operations or reduce spend, you have a better chance of raising capital.
If you’re offering this type of product, make sure the value proposition you need to have is clear to investors, including data showing the kind of resources customers can save — not necessarily just in capital, but in time and manpower. Make it quantifiable and provide compelling customer testimonials.
These products strengthen customers’ ability to weather an economic downturn and make the companies that make these types of products more attractive to investors than companies that offer “nice-to-have” goods and services.
Your business needs to be capital efficient and able to thrive in good times and bad
During tough economic times, investors seek opportunities that don’t rely on large amounts of capital to fund expensive customer acquisition strategies that take time and can fade in adverse environments.
If your model requires large amounts of capital, can you transition to a strategy that will allow your business to be more capital efficient and show a faster path to profitability?
Your business benefits from a connection to sustainability or clean energy
The investment community strives to support emerging companies that can bring innovative sustainability solutions to the market. According to our analysis of Crunchbase data, the energy sector has achieved in the first nine months of this year what it has done throughout 2021. Recent and proposed legislation provide additional impetus.
The recently enacted anti-inflation law — which includes more than $360 billion for energy and climate programs, as well as big tax incentives to boost renewable energy and electric vehicles (EVs) — will help keep investment in the sector strong for the foreseeable future.
Additionally, the SEC’s proposed climate disclosure rule, released in March 2022 and designed to give investors a more thorough understanding of how climate change is affecting the operations of publicly traded companies, will have companies clamoring for greener ways of doing business.
We’ve seen investment rounds for companies that offer compelling out-of-the-box sustainability games, such as B. those making fashion from post-consumer waste, and there has been strong funding for a slew of climate technology companies, such as sustainable nuclear power companies and electric vehicle charging infrastructure.
Be willing to show how your company is helping to solve an important environmental issue or is comparatively more environmentally friendly than a previous operational practice. Articulate the size of the market. If your product solution is also economical, that’s a bonus.
Other ways to increase your financial viability
Even if your business doesn’t operate in a preferred sector or meets any of these three key elements, you won’t have to wait indefinitely to raise funds. To be successful, you need to come to the table with more proof of value than is required in good times — such as a growing customer base, sales momentum, or an improvement in cash flow.
Now is the time to focus on serving your existing customers and adding value, rather than risky investments in new facilities or untested markets. Look for ways to free up working capital and reduce costs. Investors will be impressed if you can show good results in tough times.
You need a realistic growth plan and go-to-market strategy that shows you are adapting to current market conditions. For venture capitalists who are particularly picky about new investments, sky-high projections will be obvious.
It’s also important to be efficient when raising capital. Make a special effort to get interested investors to say “yes” by helping them learn as much as possible about your company as quickly as possible, assisting in their due diligence, introducing members of your executive team, and arranging meetings with key clients.
Step away from investors who are sitting on their hands and prioritize those who show an eagerness to learn more. If you’re not gaining momentum, there’s nothing wrong with taking a few months away from fundraising to focus on your core business.
Hard times are often when true leaders push forward. When your company is well-positioned for success, investors take notice.
Jeffrey Grabow is the venture capital head of EY US. The views expressed in this article are the views of the author or authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
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