We’re all familiar with the adage, “You don’t know what you’ve got ’til it’s gone.”
Well, that 80s rock ballad might as well be the motto for today’s current financial landscape, and there could be few places this applies better than the world of startups.
Whereas the past few years saw record investment from VC firms into early-stage companies, the current state of the economy leaves founders in a tricky spot.
You don’t need to be Warren Buffett to understand that when the economy enters a recession, there’s less money to go around.
Of course, lower funds are particularly problematic when inflation is at record levels. And, with the cost of borrowing expected to remain steep for quite some time, it becomes a riskier proposition to secure capital.
Not only that, the people who issue this capital become increasingly spendthrift themselves.
Of course, VC firms are still going to invest in startups. It’s what they exist for.
However, the machinations of how – and how much – they invest are due for a correction.
Many people might not realize that venture capital firms aren’t simply sitting on a limitless pile of money. Similarly, these firms aren’t actually spending their money.
These investors rely on, well, investors that go by the title of “limited partners.” These partnerships are limited in the sense that the source of capital cannot dictate where the VC firm invests its money.
Yet these limited partners do have control over how much money the VC firms have to invest.
This means there is a cap on how much money startups get from venture capital – and how many startups get it.
The downturn in VC funding is a big reason why startup operations are now becoming leaner and requiring more nimbleness.
It is also driving the valuations of startups seeking capital down, since the days of VC firms competing over moonshot investments are in the rearview mirror.
For example, we saw many startups secure funding at valuations north of $30 million on the back of an idea.
However, savvy founders knew that this gold rush wouldn’t last forever. So, the ones that prioritized building a runway in preparation for this shift are far better positioned than their competitors.
They’re not the only ones better positioned, though.
As the VC firehoses start to decrease the water pressure, there is another outlet for startups to secure funding that isn’t subject to the whims of limited partners: crowdfunding.
That’s right. You.
And many industry experts feel this realm is due for a substantial increase in deal flow as a result.
“I think we will see this be a real positive for the [crowdfunding] industry,” says KingsCrowd founder and CEO Chris Lustrino in a recent episode of Unicorn Hunting.
“The reality is, venture capitalists have been making mistakes for the last two years, overfunding companies, overvaluing, and then telling them to spend that money as fast as they can.
“And, now that we’re going to be going through a bit of a recession, they’re saying, ‘Hold on, everything we just told you was a lie, and you better figure out how to survive because we’re not going to help you.'”
As a result, there is growing distrust between founders and VCs. As quickly as they jockeyed with competing firms to secure investments in startups, they’ve become frugal.
“All of that,” Lustrino says, “drives founders who recognize that capital is a commodity to say, ‘Where can I go to get capital?’
“The reality is, some of the best companies that are going to be built over the next decade are going to be built during [this] challenging time. And, fortunately for us, a lot more of those companies are going to be raising from retail investors, and this is really the first period where retail gets to take front and center stage instead of the traditional VCs, and show how powerful this market can be.”
Make no mistake, this isn’t going to be easy sledding for startups in this new landscape. It will be more important than ever to undergo due diligence and snuff out the startups that are more fluff than function.
Thankfully, there is a wealth of information and resources out there to serve as a guiding light – perhaps none more useful than the Angels & Entrepreneurs Network.
With the help of such brilliant investment minds as Daymond John and Buck Jordan, our team rigorously scrutinizes each and every startup that comes across our table. The end result is a steady flow of startups seeking investment delivered to your inbox on a monthly basis.
And while it’s always wise to do your own research, you can still feel confident in the fact that these companies have already passed initial muster.
The rest simply comes down to whether or not it’s the investment opportunity you’re looking for.
After all, as Chris says, some of the best companies will be built throughout the next decade. And many of those companies will be turning to you to help charter their paths.
At the Angels & Entrepreneurs Network, it’s our mission to find and deliver them on a silver platter.
This new normal doesn’t have to be a bad thing.
The Research Team