Venture capital investment is one of the prime places startups look out for when seeking funding for their business. However, there is a lot of competition between investors doing all they can to determine the viability of a business before putting their money into it.
Investors used to look for in startups that have an experienced management team, a large market for their product or service, uniqueness and growth potentials, but, lately, the word ‘disruption’ has become a well-known term among investors with the rise of companies such as Uber and Netflix, among others. Today, investors are looking for startups unique enough to challenge an industry significantly. In the same way, various technological innovations such as artificial intelligence have made VC funding easier and less biased.
However, things have not all good in the VC market. Last year, VC investing faced a huge setback with the IPO flops of major companies such as WeWork, Uber, Slack, and Lyft. Therefore, many startups can expect investors to make significant adjustments based on lessons learned and circumstances.
Tough Business Conditions
As said by Ben Narasin, a well known Venture Partner at NEA.“in 2020, investors will require stricter administration and oversight structures to safeguard against negative impact and ensure these protections are mandated in their term sheets.”
One of the fundamental reasons before investing in a startup is to confirm that they have a stellar management team. It is one of the several measures VCs take to ensure that they get their returns from the money they have invested. To reduce some of the risks, investors are desiring to get direct control of the company, particularly its finances and its compliance with corporate regulations such as GDPR.
Investors would be more strict in evaluating startup founders and leaders, hoping to unwrap every bit of flaws and strengths in the company. This may probably drive entrepreneurs to search for alternative funding options, such as equity crowdfunding. Startup leaders hoping to win a VC fund have to be more determined in doing their homework, refining their pitches to perfection, and nailing the interviews.
Stability over Speed
In 2015, Kauffman Foundation reported that two-thirds of the fastest-growing companies go under before attaining self-sustainability, which is huge. Just because a company is growing rapidly does not mean it is stable.
During this time of uncertain stability, some fast-growing companies that face a downturn of fortunes are usually because of rash decisions. Therefore, growing too quickly can face the same risk of downfall as growing too slowly.
Fast-growing startups like Uber have taught us that the speed of growth is not always good for future performance. Steady growth is now more preferred even if it slow. It is easier to assess and determine the potentials of a startup accurately if it is stable. Only rapid growth is not acceptable anymore.
What does this mean for startups? When they found their businesses, entrepreneurs are usually filled with dreams of how their idea would change the world and want to speed up as much as possible, so much so that slow but steady growth may seem discouraging. Either way is great, but the most important thing is to not ignore the fundamentals.
Impact investing
The world is now focusing on critical issues such as global warming, climate change, education, poverty, gender activism, and of course, COVID-19. Therefore, many of the investing industries are moving in this direction to solve real-world problems.
Real-world problems are called “impact investing” where investors are not only looking to make huge financial profits but also to make an impression in the world, or at least their communities. Therefore, they are on the lookout for startups who share this vision. Moreover, many such companies are encouraged by the government in different ways, such as tax cuts.
One of the important facts about impact investing is that it is no longer a small investing community but has rather grown to be one with opportunities for massive returns just like traditional investing. Impact investments also perform well with at least 66% hitting market-rate returns. Startups that focus on solving a global challenge or those involved in sustainable tech have a greater edge in the investing market.
Conclusion
Startups now have realized what they are up against and that they must highly improve their plan if they are to win any funding opportunities. The future is not all hopeless, but the competition has just become tougher. This means smaller businesses emerging out of VC funding opportunities as investors would rather fund companies that have achieved significant growth already. This COVID 19 pandemic has devastated the economy in 2020, but there are opportunities that startups will find and companies that investors are ready to invest their money in 2021.
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