For startup operations there are an array of challenges. These include growth challenges and the process of growing becomes more challenging amidst a playing field of high interest rates and inflation.
Claire Trachet, CEO and Founder of business advisory, Trachet, has told Digital Journal about the importance of adapting to the evolved startup model which will allow for growth in the current market conditions
Looking at the situation in the U.K., Trachet assesses the economic situation thus: “Following the Bank of England’s announcement that interest rates will increase to 4 percent from 3.50 percent, combined with the ongoing economic consequences of the global pandemic, startup valuations have suffered several blows in the past year.”
As to how this situation impacts on growing firms, Trachet assesses: “The current economic downturn poses a concern for tech startups, as the industry relies heavily on raising capital as the main tool to fuel growth and gain investor confidence.”
Trachet proceeds to highlight the importance of focusing on product and profitability over growth, as a new set of rules settles in for startups dreaming to reach unicorn status.
Trachet is aware of the changing economic circumstances, noting: “Prior to the pandemic, money was being pumped into the sector by VCs, private and institutional investors as a bull market saw tech startup valuations rocket – translating to sky high returns for investors. As a result, startups who experienced growth at such a fast rate – with vast amounts of capital to fuel this – now have to reset their DNA and potentially suffer a down round, either now or in the near future. A clear example of this was fintech company, Klarna, which saw its value drop by 85%, after they stated they could not maintain fundraising in such difficult market conditions. This is a clear indicator that the high growth these startups were experiencing is not feasible, nor sustainable in the current climate.”
Drawing on real-world example, Trachet explains: “Companies like Infogrid are offering existing investors the opportunity to take part in a bridge round, or what other companies have referred to as a top-up round, in the hopes of avoiding a down valuation.”
Trachet highlights this is “kicking the can down the road”, noting: “As the nature of startup financing has now evolved past this. It’s essential for founders to acknowledge that headcount growth and financing rounds should no longer be top priority in this new landscape.”
Trachet also foresees the need for change in startup models and the foreseeable future for startups and their funding: “The pandemic-fuelled fundraising bubble that raised the value of young companies has, fortunately, deflated instead of bursting. However, as a result, many loss-making startups who were chasing the “unicorn dream” are now scrambling for funds to stay afloat.”
Further, with funding challenges, she finds: “The fundraising process has become more difficult due to a drying up of venture capital in H2 of 2022, which was caused mainly by the worsening situation in Ukraine, coupled with the energy crisis, high inflation and interest rates, which all led to declining valuations. This has put founders in a tough position, having to choose between accepting investment at a lower valuation and giving up a significant portion of their equity, or, holding off on fundraising and potentially running out of resources – many founders have chosen to wait.”
Trachet thinks that the funding process will improve: “There is now a growing number of investors who are sat on a dry powder pile having deterred investments in 2022. This means there are significant opportunities on the horizon, and now is the moment to prepare and get deal ready as optionality will increase in H2 of this year.”
Moreover, Trachet observes: “Indicators suggest early-stage startups will have an advantage in this current market, as growth investors are seeking to invest in earlier stages, from seed to series A, with smaller amounts of capital to sustain their businesses. These startups have a lower burn rate, giving them the potential to come out as dominant competitors if they can withstand the challenges.”
