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It is Much More Difficult to Raise Funds, isn´t It Great?

By Ricardo Godinez - Enso Fintech
CEO

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By Ricardo Godinez | CEO - Tue, 09/06/2022 - 11:00

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After two joyful years of crazy fundraising and valuations, the market is once again suffering, and startups will have to work harder to raise money or even to survive. So, why in 2022, a year of dangers, would I dare say this could be good news for startups? Here’s a perspective on why this could be positive but let’s break it down and you can decide.

A little teaser: If the past two years have taught us anything, it's that out of every crisis comes opportunity. In today’s economic slowdown, maybe it's the right time to listen to your market (again), talk to your customers (again), check the relevance of your products (again), or even reconsider switching strategies at a lower cost.

A Bit of Context

In the past couple of years, the pandemic advanced the tech industry exponentially. If your aim was to digitize a service or a product, you probably saw a positive outcome. Not only did digitally oriented companies thrive but customers turned to more digital lifestyles. And this wave of joy was backed by many tech-investors in a grand scale, seeing record valuations and plenty fund raising. The tech-bubble has been very visible and if we look at history, we all kind of expected for this bubble to burst at some point. 

Today’s economic downturn is shaking the ecosystem and even the big VCs are starting to totter. From Bloomberg US: “SoftBank (one of the largest investors in financial technology) Pledges Sweeping Cost Cuts After $23.4 Billion Loss” According to Crunchbase data, globally, venture funding dropped to US$39 billion for the first time after a full year of being above US$40 billion, which itself is much lower than the US$70 billion peak in November 2021.

TechCrunch (one of the biggest media-outlet-influencers in the tech world) wrote an article in May 2022 saying that YCombinator had started giving advice to portfolio founders to “plan for the worst,” advising startups to cut down and optimize on cost (reduce burn rates) to try to have enough cash to survive for 18 to 24 months. Nobody can be sure how long this will last, however the message is loud and clear: “We don’t know what will happen, so be prepared for the worst.” 

Enough With the Ugly, Why Is That Good News?

Some industries are growing more than others, same for companies, what is interesting is that some sectors like Proptech, click-and-collect, challenger banks and some home-delivery services have been consolidating at exponential speed but at the price of dreadful losses. Particularly for some companies, it seems that losing money is their best strategy.

Today, where money is scarce, I see an opportunity to refocus on things that money was making us not see.

After years of record valuations (sometimes unquestioned valuations) across the globe, this economic situation is welcome. Why? For the last two years, conversations in fintech in Latin-America had one constant topic: how much money was raised and at what valuation. I welcome this moment because now, without money, we can get back to really making decisions under a context where inventiveness, innovation and creativity are necessary to disrupt, survive and thrive.

With money came lots of hiring and crazy wages (versus building long-term employee retention strategies) and crazy marketing expenses (sometimes backing some unstructured growth strategies, such as unreasonable price discounts for customer acquisition). Is that wrong? No. Was it necessary to base most of the growth strategies on money? I doubt it.

A great example is Proptech. 2020 came with low interest rates and Tech companies rushed to serve potential buyers. Venture dollars flowed and Companies like better.com went on a hiring spree because they could not keep up with the demand. And then came 2022. And then came the layoffs.

Of course, raising funds is essential, especially in the case of a strong need for technological innovation that requires capital (as it is for us at Enso). However, I wonder if money has been blurring our vision not making us think about innovative business models that are more lean-and-mean, in reference to the article from TechCrunch “Burn, Baby, Burn” form August 28, 2022. As Mary Ann Azevedo states in her article “Operate capital efficiently all the time, downturn or no downturn, and you won’t be as panicked and sinking when the going gets tough. That means not hiring for the sake of hiring, thinking long-term and not spending like there’s no tomorrow.”

Cherry on top, I am just personally happy that today, instead of listening to the unicorn headlines “…in millions raised, billions valued, and number of employees,” we are once again going to talk about real business concept: key assets, how real employee strategies matter (over money) in terms of retention rates or even the more basic and important theme of creating profitable business models.

These next 12 or 24 months will be great because we will have to get back to the basics of what a business is and it will be the founders and entrepreneurs building innovative and disruptive solutions that will thrive. I believe most of the best ideas have come out of companies mostly being “inspired” by a bootstrapped business model. 

This is not always the case of course and yes there is still money out there for companies already in the growth or scaling phase (as there should always be!) This article is not about “not needing money” but how “not having it” sometimes is a necessary exercise were amazing ideas come from. Scarcity.

Prepare for the Worst, Come out the Best 

Perhaps, we will have to agree to grow slowly while spending less money, whether it is on expanding, recruiting, marketing or other areas, choices will have to be made, action plans will have to be written, then re-written regularly. What is the best way to not lose track? The founders and entrepreneurs will need to monitor their burn rate, their cash flow, their inflows and outflows even more carefully. Or maybe I’m too optimistic.

Addendum of hope: Not that this has anything to do with the message I intended to convey with this article but for the sake of those seeking seed capital, the TechCrunch article also stated that “while late-stage and technology-growth investing have been most severely impacted, seed funding remains surprisingly robust.”

Photo by:   Ricardo Godinez

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