As startups navigate various macroeconomic challenges, such as interest rate hikes, soaring inflation, and devastating business energy costs – trying to maintain investor confidence and interest becomes increasingly difficult.
We've seen this first hand as a study from Pitchbook, as well as the new “cautious funding” trend from the recent 2023 UK fintech report, both outline that later-stage startups have experienced the largest drop in valuations in 18 months.
Despite this, while startup valuations and deals remain low, I believe there is potential for there to be an uptake in M&A from investors who are sitting on dry powder.
Whether a startup is trying to extend the runway and ensure business survival until a deal is done, or simply to secure investment, I believe these are some key points that startups can use to help keep cash flow strong and valuations robust during the current funding drought.
Hiring a fractional Chief Financial Officer (CFO)
Hiring a CFO on a fractional basis provides founders of smaller businesses and startups with an expert who can help either source or secure funding at an early stage. In this way, CFOs help startups get places quickly, which can be difficult for founders who do not have this experience, especially during challenging market conditions.
CFOs serve as experienced professionals who can anticipate the various financial hurdles that will likely be presented to startups.
With the top cause of startup failures being the result of the business losing cash or failing to raise new capital (38%), according to a survey by CB Insights, the need to have a professional who can manage the cash flow and cut costs even on a short fractional basis is crucial in the current climate.
Although founders have traditionally been keen to keep control and might be reluctant to hire a CFO due to costs, the value of their experience is invaluable in helping companies save millions.
It is in times of crisis that startups will need to lean on experienced people and someone who can be in their corner when negotiating with venture capitalists or angel investors.
Diversification and flexibility
For startups that solely rely on a single revenue stream or customer base – particularly in challenging times such as the current market – they tend to find themselves vulnerable to economic downturns.
With this in mind, it’s important that startups look into diversifying their revenue streams, pivot products or services to cater to new markets, or even adjust business models.
This means expanding into related sectors, offering complimentary services, or exploring new geographical markets. By doing so, they will not be placed in a difficult situation if, for whatever reason, their single revenue stream comes under pressure.
Leveraging technology and automation
While the outlook of the beginning of 2023 appeared less favourable with valuations plummeting, the release of ChatGPT set out a new standard for the world of tech and startups.
Looking at the current market, the trend around generative AI appears far from over, with businesses using the technology not only for day-to-day operations, but as a key component for attracting investment in the current economic climate.
As the space continues to grow, with the UK's current AI market worth over £16.9 billion and predicted to grow to £803.7 billion by 2035, integrating AI technology becomes crucial for startups.
The technology serves as a way to streamline processes and increase productivity. In addition to this, AI can also help keep costs low and even enhance a startup’s customer experience, all of which can contribute towards maintaining a high valuation.
However, while AI can be used positively, it is crucial that startups take a step back and assess whether this is the right decision for their business and if it will benefit their clients.
It’s also important to not completely rely on AI and neglect human interaction, emotional intelligence, critical thinking and judgement – which are key skills that are needed in running and maintaining a business.
Emphasising long-term value and building strong relationships
Startups need a clear vision and mission that transcends short-term economic fluctuations to assure investors of enduring value.
A sustainable business model, focusing on recurring revenue or diversified income streams, suggests resilience and stability.
By valuing stakeholder relationships, innovating based on feedback, and retaining top talent, startups can create a foundation of loyalty and adaptability that further boosts their valuation.
Transparent communication with investors is also essential for building trust, ensuring they remain engaged and committed over time. Instead of merely chasing growth, startups should also highlight solid unit economics to prove long-term business viability.
Investing in brand building and maintaining a strong reputation ensures that startups are optimally positioned when markets rebound.
So, by combining short-term survival strategies with a long-term vision and deep-rooted relationships, startups can maintain high valuations even during challenging economic climates.
Summary
Founders must be aware that the market is constantly changing and as a result, challenges will arise that will make maintaining high valuations more difficult.
Despite the difficulties startups are currently facing, I believe there is cause for optimism as interest rates and inflation subsides and investor confidence returns.
By taking these factors into consideration, startups will have a much better chance of being able to maintain a high valuation and thrive when the market improves.
