Are You a Tech Startup Looking for Funding? Think Twice
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Are You a Tech Startup Looking for Funding? Think Twice

Photo by:   Nur Malek
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By Nur Malek Pascha - Enviopack
CEO

STORY INLINE POST

A lot has been said about the market, recession and what the future will look like in a bear market in 2023. But little has been said about the experience of fundraising in 2022 and what VCs are looking for, or what it seems they are looking for, as the rules do not seem to be clear anymore.

Historically, VCs funded hyper-growth companies. These companies are conceived to grow at all costs, and, of course, this implies investing or burning money to get to the next target or round. Typically, this has been the model of Silicon Valley and all the well-known companies called unicorns, which achieved very high valuations and revenues at the expense of profitability and unit economics, especially during the pandemic. This was the world we knew. 

But today’s market is different. Many well-funded companies are running out of cash, others with great unit economics and financials have also had difficulties raising money even if they are profitable and fundraising for growth in a sustainable way. In fact, in Latin America, the financial climate is far from 2021 as there is a perception of huge uncertainty around Latin American dealmaking, even though the potential of the region is undeniable.

This makes me think the rules have changed or that there are no rules at all, as, in fact, fundraising shrank globally. Is it a matter of unit economics and profitability? Or is it just an illusion for founders to think that being sustainable will guarantee VC-backed money? 

First, there is an important difference between early stage and late-stage startups. In fact, as Crunchbase has stated, “high-valuation startups will need to pare back costs to make it through what looks like a tougher late-stage fundraising environment.” This definitely  applies to unicorns or similar companies but this is not the case for early stage funding, which received a total of US$1.3 billion invested in 1Q22 — still 160 percent above the year-ago total, so the notion of decline is somewhat relative. Some argue that Q1 of 2022 is not representative of the rest of the year, where we saw some pullback even though it was not that alarming.

But also, there is what happens in the real world. And truth to be told, there have been a lot of great companies executing massive layoffs and the perception is that fundraising is going to be tougher in 2023 in spite of the data and this trend of layoffs is going to continue. In fact, the terms camels and cockroaches for companies that survive in spite of the VCs have been very popular lately as a differentiator of what companies look like when they survive by their own means. So, hyper-growth, which has been the business model for the last 10 years, has changed for good and now the popular companies are those that do not need external funding to survive?  

I don’t think so. I’ve been in the industry for long enough to be certain that more likely, there will be a new equilibrium. Companies cannot burn huge amounts of money because money isn’t free anymore and inflation is striking globally, but also, tech companies cannot always grow without external funding, as it affects their working capital and employee retention. This idea of high velocity startups that need to burn capital to sustain their growth prior to achieving profitability will slowly disappear due to the actual world reality.

Probably the answer is somewhere in the middle. As the CEO of a bootstrapped company that expanded to three countries without any external funding, I give myself and the team the credit for building a sustainable business, with a tech-enabled model applied to logistics that actually solves a real problem for our more than 2,000 clients all over the region. We did this thanks to our technology and team, which was very persistent, resilient and wise when spending the resources that we got from our organic growth. Being a “camel” ourselves, we know what it means to preserve cash flow and we know all about unit economics and sustainability. But also, we know that to grow, we need external funding. Not to spend on superfluous expenditures, such as fancy events, but to invest in aggressive growth. It seems that this market is a perfect fit for us. Only time will tell. 

Photo by:   Nur Malek

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