VCs, investors, and entrepreneurs are discussing five trends

 VCs, investors, and entrepreneurs are discussing five trends

important lessons learned

Investors are searching for more detailed company strategies and are concentrating on the basics.

The most popular startup industries have evolved.

More than ever, founders are thinking about doing mergers and acquisitions

Entrepreneurs and financiers are contemplating the possible state of the investment scene in the next months or quarters. The weak state of the markets, rising interest rates, and unrest elsewhere have all contributed to the market's volatility. Long-term growth prospects in the IT industry may persist, but in the short term, the market would be so unstable that many investors and entrepreneurs would have to veer off course.

Given the present burn rates, the road ahead may not be simple. In our State of the Market analysis for the first half of 2022, we found that over half of all VC-backed tech startups would have to raise capital next year.

Board meetings take place on a regular basis inside venture capital businesses. To concentrate on their current portfolios, they have often ceased investing entirely. According to our research, worldwide venture capital financing decreased by 22% in the second quarter.

Upon reviewing their slates, venture capitalists will be evaluating whether the firms are well-run and well-positioned for funding. They can be thinking about the firms for which they have reserves and those for which they don't. However, not everything is bad: VC funds worth around $269 billion are available for use.

What does this entail for the founders, then? The way that investors and you talk has evolved. Certain sectors are seeing a transfer of capital to others. In the middle of 2021, a pitch meeting, something may have worked, but not today. The speed has decreased. The following five tendencies are also noticeable:

1. The three-year plan is returning

The founders must raise capital with well-defined goals for an extended period of time. Founders used to be able to get away with a 12- to 18-month strategy, but investors now like to see a 24- to 36-month plan. If you don't hit goals within that time frame, they may not want to invest.

VCs are not attempting to close acquisitions at any cost, in contrast to 2021, even if they believe the entrepreneur has enormous potential and the industry is trending. More all-encompassing, forward-thinking programs that provide both short- and long-term growth in users and revenue are what investors are searching for.

2. Revenue is reappearing; development at all costs is no longer an option (for the time being)

Once again, fundamentals are crucial for investors. In the early stages, revenue is crucial and has grown to represent the core of investor interests. On the other hand, growth is prioritized above everything else.

Revenue is the least expensive and often most sustainable kind of operational capital, particularly early revenue. This indicates that categories showing consistent returns, if not spectacular ones, are looking better than they have in a long time. B2B SaaS enterprises are thus back in vogue.

In a similar vein, one unintended consequence of direct-to-consumer (DTC) buying in the early phases of the epidemic is the ongoing expansion of e-commerce enablement. Following the pandemic, people started purchasing online so often and regularly that businesses specializing in supply chain management and online product returns released "2.0" or "3.0" versions of their websites. E-commerce enablement is a hot, adaptable field with substantial, long-term income potential as a consequence. Consumer spending is increasing despite the ongoing discussion over the recession, according to recent economic figures.

VCs are showing interest in startups that can generate a million or two million dollars in revenue the following year. Why? As opposed to a Web3 business whose sales would have decreased by two years, they might have a higher chance of investing money in that company over the course of a year or two. The average fund's Web3 ratio may drop, but some investors may still hedge their long-term bets and set aside money for Web3 businesses that seem to represent the Internet's future.

3. The importance of "domain expert" founders is rising.

Because founders believed it would increase their chances of securing a VC meeting, we observed a fair bit of Web3 lingo on the decks of startups last year that had nothing to do with Web3. Furthermore, we saw other businesses with fintech designations that, for the same reason, were not fintech. It's quite unlikely to work today if it didn't work back then.

Currently, founder genuineness is what appeals to venture capitalists. These are decades-old operators, first-time founders, and bootstrapped entrepreneurs who are now launching businesses with the risk of full ownership and their accumulated experience. They provide a methodical and disciplined strategy to venture investors when they join the industry. They have experience managing a company without venture money. In the investing sectors, hard-won expertise in certain industries is now even more prized and acknowledged.

4. There might be a perfect marginal product-market match

Even a modest amount of early revenue traction might be more important in a decreasing market than a big idea that won't be profitable for another two or three years. It might be more crucial to pay attention to what your clients require right away rather than waiting to locate a product that fits the market and can provide large-scale outcomes.

It could have made sense to postpone realizing that ambitious goal until 2020 or 2021, when money seemed to be reasonably simple to come by. For the time being, it could be a good idea to put something more tangible in place of the lofty goal, at least temporarily.

5. Founders are thinking about acquisitions and mergers more quickly than they anticipated

We are hearing about early-stage entrepreneurs, or those at the pre-Series A level, going through mergers and acquisitions (M&A) far sooner than they intended because of the market uncertainties we are now experiencing. Founders who raised two or three million dollars in the past are now considering acquisitions for twenty or thirty million dollars. Typically, VCs expect a home run from their entrepreneurs, not this one. These M&A funds will return the early-stage money (perhaps doubling it) while doing nothing to reduce the returns—VC funders demand return exits.

An exit offer begins to seem rather attractive if the entrepreneur is unsure whether they can raise another round within the next six months and their VCs aren't willing to prevent a round from collapsing. There are currently entrepreneurs who are running out of runway and face a challenging fundraising situation since they had to raise money at the beginning of the epidemic. A small exit offer might be beneficial and provide you the flexibility to launch another business later on.

Over the last year, and especially in the last several months, the dialogue with investors has evolved. Making the greatest choices for you, your team, and your business may be greatly aided by being ready for those new discussions.

It's challenging to run a startup. To find out more about what you should know at various points in the early phases of your business, see our business Insights. Also, have a look at our State of the Market report for the most recent developments in the innovation economy.