Investors at Collision2024 stated that after the end of the salad days with zero interest rates and the ” flight towards quality,” VC firms are now operating under a new playbook, one that focuses on balancing sustainability and profitability.
BetaKit interviewed partners from a variety VC firms who spoke at the tech event in order to give founders a better idea of what investors think about the current fundraising climate.
Use what you have
After a difficult 2023, which saw many layoffs VCs are focusing on startups that work with their resources.
Spencer McLeod of Chicago-based G Squared said, “Investors tell companies to be careful with every dollar they spend.”
He added that AI startups still have a strong access to capital. McLeod also mentioned that companies who have reduced their workforce are looking at ways to maximize the value of each employee. Klarna is an example.
Magaly Charbonneau, Inovia Capital’s partner, said that things are picking back up in Canadian venture capital after a slow start to the year. What is important is that our CEOs adjust their burn rates and adjust the size the team. So, there were a lot [of reductions in forces] at the end of last year and beginning of this year to increase the runway and accelerate growth.
Profitability is the key to success
Charbonneau said sales, especially for software-as-a-service (SaaS) companies, are taking much longer to close–a sentiment echoed by Christophe Bourque, general partner at White Star Capital, who attributed some of the delay to companies pausing new SaaS licenses while they figure out their AI strategy. As a consequence, founders had to focus on their unit economics for the past 18 months.
“Last Year… the multiples [were] super high, so now [companies] must grow into these valuations. They’re wondering what to do, [that] their growth targets are not being met — but you need to build options. You need to ensure that you are right-sizing your staff, and that you have a strong unit economics. You also need to have a path towards profitability. Otherwise, you may not be in a position to raise another round,” Charbonneau explained.
Stephanie Choo, a partner at Portage Ventures said that the zero interest rate policy and the mindset to pursue growth at any cost will no longer be relevant in 2024.
She told BetaKit that VCs, unlike in 2021, are looking for growth – but efficient growth. “VCs do not base their exit cases on multiple expansions.”
The bar has risen for companies to reach this level of revenue.
Startups face a number of decisions.
McLeod stated that his firm is primarily focused on Series C and beyond companies, and at this time, the market for these companies has frozen. “People don’t focus on [total market addressable], they’re focused only on gross profit,” said McLeod.
“We’re looking at companies that have tens of million dollars in revenue and [asking] if we can take this to hundred of millions?”
Bourque said that the market is still competitive for companies in their early stages. “I wouldn’t claim that the market has shrunk that much, at least in Series A and B. If you have a business that is growing 3x per year, and you are managing cash well, you will get a lot more term sheets.
The Series A valuations are still the same, Neha Khera said at a panel on “New Trends in Early-Stage Investing.” But the bar for reaching that valuation has risen, especially when it comes to revenue.
On a panel discussing early-stage trends, Sarah Deshpande said, “Getting from a seed to a pre-seed is difficult right now, because you’ve already invested some capital and you’re expecting premiums on your valuation but it’s still very early.” “Once you get a little traction, a lot Series A capital is available [but] the bar for that is very high.”
She said that investors will be looking for founders who are confident in their vision and are willing to fight for it. However, it is still prudent to make sure “your funnel is very wide.”
Traveling to the States
Ryan Henry, partner of Sand Hill North Ventures said that the early-stage market is more crowded in the United States, with more VCs. This makes it easier for startups to raise capital quickly.
Henry told BetaKit that it’s unlikely a Canadian founder will only build in Canada, unless they work in healthcare or want to be the new Wealthsimple. “There are definitely companies that you can only build in Canada. But more than likely, you’re going sell to US companies and US consumers. So you should speak to their investors.”
Douglas Soltys has provided the following files. Vaughn Ridley/Collision by Sportsfile.