Also read: Women-Led Start-Ups Saw a Decline in VC Funding in 2023: Report
From raising funds based on a back-of-the-napkin business plan, to proving a potential product-market fit, many new enterprising entrepreneurs are now intentionally delaying their VC funding roadshows for a number of very good reasons.
Seed stage deals have come down drastically. In 2019, there were 8,600 deals made with a value of $19 billion, in 2023 approximately 7,000 deals accumulating $15 billion in total funding. While the deal count came down by a significant, but modest, 19 per cent, the total funding amount cratered by 33 per cent adjusted for inflation.
More so, nearly 40 per cent, or 2,725 of venture capital funds, globally made no investments at all in 2023. With funding opportunities limited, and the vast amount of time and energy invested in sourcing and preparing for pitches, focusing on finding the right product-market fit has become a priority.
Speaking to Sifted, an online publication by the Financial Times, an early-stage founder Jonatan Rassmussan says ‘It’s close to a full-time job, I had two to three meetings a day with investors, then spent time answering specific questions and thinking through [the] pitch and revising based on feedback.”
He went on to say “I’d guess I spent four to five hours a day on the fundraiser for the five months we were raising.” For many early-stage operating founders without a large team to pick up your slack, spending such a significant amount of time and resources just isn’t a realistic possibility.
Early traction is a must these days for venture capitalists. Notably, Upfront Ventures’ Mark Suster who has invested in more than 450 seed stage deals highlights, “You One would have to show early traction to convince investors that there’s a market for your product. Numbers are critical, but equally important is the narrative that shows you understand your customers and have a defensible business model.”
Gone are the days where eccentric characters like Adam Neuman of WeWork, Sam Bankman-Fried of FTX, or Elizabeth Holmes of Theranos, can enamour backers with charm and a quixotic venture. Entrepreneurs have to keep in mind that venture capitalists too are responsible for their portfolio company’s performance, which leads me to my next reason why founders are shifting away from the VC funding route.
The increasing investor pressure to exponentially grow a business. We’ve all heard the phrase “growth-at-all-costs”, but sometimes it costs the entrepreneur everything– including their business.
A more recent example of this is Dunzo, a hyper-local delivery app based in Bangalore, of which I was a user from day one, when you had to chat with a live executive about what needed to be “dun”. Later on, they streamlined this to be automated and narrowed their offerings to a handful of use cases to achieve a proper product-market fit with the potential of actually profiting one day. They were the front-runners in this market, and they dominated it so much that a new verb was born.
Getting things “Dunzo’ed” was not only a short-lived trend, but it changed the way people managed their daily lives and businesses. When the pandemic hit, and nobody could leave their homes, everyone was sure this was their time to really really shine– home deliveries from any store providing just about anything was their forte afterall. However, quick-commerce, the dark store revolution and their investors pressured them into a fierce cash fueled battle to attract new customers, reduce delivery times of thousands of products that ultimately changed their asset-light operating model. Today, their rivals who had diversified business models dominate the quick-commerce landscape, and it’s sad to say that Dunzo’s core business is hardly a shadow of what it once was.
With seed stage funding becoming significantly less available, VC’s being as cautious as ever while demanding early traction and revenue and budding entrepreneurs seeing first-hand the downside of growing at all costs, it’s no surprise that early stage ventures are seeking alternative avenues to fund the next big thing.
Whether it’s raising a small check from friends and family, moonlighting while still working, or raising from a clutch of astute angel investors, building the foundation to the business has come to the forefront, and it’s no longer about who’s received the largest check.
(The author is Ashok Shastry, Co-Founder and CEO at DriveU.)
(The views belong solely to the author.)