The American economy is as vibrant as ever, and part of what has made it so strong is a business culture persistently favorable to small businesses. But modern economic realities have ushered in sweeping changes in the traditional ways companies seek out investment and financing. These shifts are only becoming more frequent and consequential as time passes, putting at a disadvantage any firm that is slow to adapt.
Sources of seed financing now smaller, more diverse
Until recently, the typical trajectory of a seed- or growth-stage company entailed first securing funding from venture capital firms or other private equity sources. From here, the business would grow to maturity in terms of marketing and sales strategy until reaching one of two paths forward: being acquired by a larger firm or going public. But the realities of today’s diverse, competitive market for startup finance have changed the calculus that has been accepted for so long.
“More competition and closer scrutiny is putting pressure on seed-stage companies.”
In perhaps the more obvious change, investors have become much more cautious in both the public and private equity markets. The past year saw the lowest number of initial public offerings on U.S. exchanges since 2009, according to Reuters, falling by a third compared to 2015. In addition, fewer companies that have recently gone public are beating their IPO price, only adding to the chilling effect.
Meanwhile, a major sector of the private equity market is having a rough go of it as well. Venture capital firms have long relied on an investment strategy where big bets are placed on just a few companies in the hope that at least one will turn out to be a blockbuster. This strategy focused on finding “unicorns” – companies that achieve a mature valuation of more than $1 billion – and is becoming less feasible than it was only a few years ago. According to data from CB Insights, a company that raised its first seed round in 2014 stood an 88% smaller chance of reaching unicorn status than it would have in 2009. Since VC funds have traditionally relied on massive successes to fund the rest of its portfolio, the end result is a tough market for entrepreneurs in 2017, who must now design their companies to do more with less financing off the bat.
What does this really mean for seed-stage companies today? As Forbes contributor and venture capitalist Sunny Dhillon explained, startup founders must not rely on big cash infusions upfront, as more investors look to spread their capital thinly and opt for leaner firms. But conventional VCs have also been valued for their ability to incubate seed-stage companies through intangible investment, like assistance with accounting processes and high-level business development. As these VC firms fall by the wayside, being replaced by results-driven corporate investors, startup founders can’t expect any form of strategic handholding.
“[A corporate investor’s] ‘day job’ is not to help the startup grow — it’s to run their corporation to the benefit of shareholders — and mentoring startup experiments can fall to the bottom of the list when standard work beckons,” Dhillon wrote.
Looking ahead at finance
In the modern private equity landscape, entrepreneurs need to create and lead leaner organizations poised for growth. To add to that challenge, they will see less financial and strategic assistance from their funders and instead will be expected to deliver results first and foremost. Making these two goals a reality requires gaining a sound understanding of a company’s financial makeup. Every dollar flowing into and out of the business must be tracked and analyzed, a balancing act of huge proportions even for the smallest startup.
Luckily, Consero offers a pertinent solution to this seemingly tall order. Unlike traditional outsourced financial services, Consero puts startup executives in the driver’s seat of their own company by giving them the tools to visualize data and make informed decisions. When institutional investors can no longer be called upon to make crucial choices, executives can rely on Consero to bolster financial visibility and ultimately improve the company from several angles.
Learn more about how Consero can help your company overcome these new financial hurdles.