3. February 2016 Fabian

Startups to face hard times – keep your money together

In recent months I have seen several startups struggle with their pre-seed and seed rounds, since they lack the traction to raise a Series A round. I predict challenging times ahead for these high-burn-rate companies. Getting investors to part with their money will get harder and harder. I therefore highly recommend keeping costs low and accepting moderate valuations.

Let’s start with the bad news

Tech IPOs in 2015 performed worse than the average market and lost 30% of their value (a second look at the 2015 Tech market).

Several prominent Unicorns have and will face down rounds (the end of big Venture Formula).

There is talk in Silicon Valley of Business Angels investing less in early-stage companies (As Angel Investors pull pack, valuations take a hit).

Seventy-eight percent of tech CEOs agree that in 2015 it became harder to raise additional funds.

On top of this, we are currently experiencing a bubble in stocks, bonds (corporations & states), and real estate. The market is flooded with liquidity and the returns for investors are terrible.

The world economy is facing a global recession (6 factors that point to global recession in 2016). Here in Germany, we are already seeing an 80% reduction in advanced bookings for plant engineering. This means other countries have stopped investing (KKR 2016 outlook – adult swim only).

In a nutshell – it’s never been easy to raise money and it’s not going to get any easier in the near future.

We’ve had seven good years. What will the next seven bring?

The good news

Three billion people are connected to the Internet. This number will double in the next 10 years. This means plenty of customers for you all. Alongside this, over 50 billion new devices will come online.

It is easier, cheaper and safer to start a company than ever before. There is plenty of support, early-stage grants, professional investors and free knowledge.

There are countless great technologies in the pipeline: virtual reality, artificial intelligence, self-moving objects, DNA medicine, the Internet of Everything.

Those who have a strong product, paying customers and sustainable growth will always get the money they need (Summit Partners invests 31 million € in the Berlin based Software company Signavio).

Don’t use Uber to drive to your penthouse office

Starting a company is just the beginning. Many first-time founders receive money from early investors and now have more cash in their (startup) bank accounts than they ever had before, and so they start spending it.

There is no reason why the founders have to use Uber to get to their penthouse office, with their company burning €600,000 a year without making any turnover.

To make it clear: burning money is NOT an accomplishment.

I have seen valuations which I no longer consider healthy.

For a concept alone and no entrepreneurial track record, one founder wants a pre-money valuation of €3,000,000.

A hardware startup with a prototype and a lot of Kickstarter liabilities (Kickstarter is debt), expects €12,000,000 as a current valuation – without having made a single sale.

Another young company is asking for a valuation of €20,000,000 for their third seed round, also without making sales.

I have seen a startup with 180 (part-time) Business Angels which raised over €2,000,000 during a friends & family round.

This is not Silicon Valley. This is just Berlin.

Startups should always be lean

These are extreme examples. Not every startup is overvalued.

However, just as a reference, if you start with a company builder, they keep 99% of the shares and you get 1%. If you apply for an accelerator, you get €25,000 for 10% (that makes €250,000 post-money).

Most experienced (full-time) Business Angels invest in startups with valuations below €1,000,000 pre-money.

The consequences of overinflated valuations during friends & family and seed rounds are easy to observe. Many startups struggle with pre-seed and seed rounds. They have the financial need for a Series-A round, but lack the traction (sales and growth).

The next 7 years aren’t going to be easier

What you can take from this:

Stay lean. Stay focused.

Be humble with your valuations. Be visionary with your goals.

 

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