A Startup is like a race horse, designed for one mission: winning. They are not built for a long career but rather to achieve greatness in a short amount of time. However, not all startups win, and many have to bow out of the competition. But for those who do make it, they become legends. In the first of this two-part blog, we’ll discuss how startups can survive and thrive in today’s market, using insights from Whistle CEO David Zeff and EVP Investment Principal Mark Velik.
According to Velik, the venture capital (VC) industry in Australia is relatively new and small. As a result, companies have had to be very capital efficient and focus on sustainable growth. While 2023 is a difficult year for startups with funding being tighter, Australian companies thrive in this environment because they’ve had to in the past. EVP’s portfolio consists of 44 software businesses, ranging from early-stage companies to those that have scaled through to the AUS 100 million ARR mark.
There has been no drastic change in what VCs are looking for in startups. VCs have always been on the lookout for standout founders with a deep understanding of their problem and the tenacity to build a large business. This is critically important for a VC when assessing an opportunity. VCs rely on founders for industry knowledge and product insights.
Compelling products and services that solve painful problems for a large number of potential customers are also crucial. It’s important that people are willing to pay for the product and that there is a possibility for the price to increase over time. Market size is very important; VCs want to see that there are a lot of potential buyers.
Sustainable business models that can underpin long-term profitable enterprises have always been important but are becoming increasingly relevant. Even pre-profit companies need to show that there is a way to make money in the long term—in other words, is there a path to profitability?
The opportunity for rapid growth is the most crucial factor for VCs. Enterprise companies may take 40+ years, but venture companies are expecting startups to get there in 5–10 years.
Fewer than 10% of startups that raise a seed round successfully raise a Series A investment
In previous years, there was a huge amount of capital available at that early stage before companies had real customers/fully built-out models. However, this is changing, and VCs want to see traction, customers, and opportunities for profits down the line. It’s not easy to gain those first customers and generate revenue in the early days, which makes it difficult to prove to investors that the product is viable. This is why the founder’s profile is so important to investors.
As of 2023, sustainable burn matters as much as historical growth
In 2020 and 2021, growth was the most important factor, and it didn’t matter how much money was being burned. However, recent market shifts have resulted in the “Rule of 40” being a greater determining factor than historical growth. It affects a company’s valuation twice as much as historical growth in today’s market. VCs want to see that a startup is growing, not burning too much cash today, and that there’s a strong underlying acquisition engine that’s scalable and has the underpinning of profitability.
Once a startup reaches the Series B or Series C round, it will probably work for 1.5 to 2 years before bringing in new capital
It takes time for the return on investment to be – typically 18 to 24 months. Within this timeframe, there are usually two routes: 1) burning the same amount every month and slowly diving into the ground (not recommended); 2) making bets early, scaling and optimizing for growth, and generating profit to become self-sustainable.
Impact investing is becoming more prevalent
Zeff also mentioned that there is a growing trend towards impact investing. Investors are looking to support startups that have a positive impact on society and the environment. This means that startups that can demonstrate their social and environmental impact are likely to attract more investment.
To survive and thrive in today’s market, startups need to focus on becoming self-sustainable as soon as possible. This means generating revenue and profits to fund their growth, rather than relying solely on investment capital. Startups also need to focus on building a strong team with diverse skill sets and backgrounds. Having a strong team with a shared vision and complementary skill sets is crucial to the success of a startup. It’s also important to have a strong culture that aligns with the company’s values and goals.
Another key to success is staying agile and adaptable. The startup landscape is constantly changing, and companies need to be able to pivot quickly to respond to new challenges and opportunities. This requires a willingness to experiment, take risks, and learn from failures.
Finally, startups need to be focused on creating value for their customers. By understanding their customers’ needs and pain points and delivering a compelling solution, startups can create a loyal customer base that will drive their growth.
While startups face many challenges in today’s market, there are also opportunities for those who are able to navigate the landscape successfully. By focusing on becoming self-sustainable, building a strong team, staying agile, and creating value for their customers, startups can survive and thrive in today’s competitive environment.
To learn more about how Whistle can help you to secure your first customers, visit our site.