All of this talk of high burn rates and tens of millions of dollars being spent at loss-making startups sounds more like the rumbling of a far off war than something early stage European startups should worry about. And yet European startups will soon have to worry about the arrival of winter.
CB Insights, sounding skittish introducing its quarterly VC funding report (Q3 2014), said: “Let’s ease up on the bubble talk shall we?” Their report shows two stark signs winter really is coming: in the first nine months of 2014 there has been $33.75 billion in VC funding (59% more than the same period in 2013) with a funding dip of 30% in Q3, and deal volumes down 10%.
Funding in Europe is also higher than in 2013. Startups in London have so far raised $1 billion (£626m) in VC funding, with the UK taking the lions share (28%) of European investment in 2014. Tech City News believes “We shouldn’t expect investment to slow down anytime soon.”
No one wants funding to drop. Not this writer, not Tech City News or CB Insights, not even Silicon Valley VC’s Bill Gurley and Fred Wilson who first sounded the alarm. But not wanting something won’t necessarily make it so. Founders should now prepare for the worst, but plan for the best.
Winter survival tactics
One of the main reasons Valley VC’s sounded the alarm was their concern over high burn rates. Massive sums of money being thrown at loss-making strategies. Given the amount of funding in the UK is comparable to maybe a handful of Midwestern states we need to re-frame the issue for our own startup ecosystem.
Most European startups don’t have tens of millions to throw at strategies which are unlikely to make an unprofitable venture start handing out dividends. Even so, if – or when – VC funding drops in the US we will feel the impact in Europe, sooner or later. There are a few things founders should be doing now to prepare for when the cold starts to bite.
1. Get your buckets out: fill them full of funds
While startups are still sexy and viable (to investors and the general public: crowd funding) get as much cash in the bank at the most favourable valuation you can get. Money will only get more expensive later on. Make sure as little of it as possible is debt funding. Loan notes which can be converted will be when upstream funding starts to dry out for VC firms.
2. Are you generating revenue?
No. Then don’t quit until you are. Yes: great – generate more, a lot more! No idea how? Time to get a clue or get off the field.
Not counting social enterprises, a business which isn’t generating revenue isn’t a business; it’s an expensive hobby. Revenue, customers or a clear go-to-market strategy are already more important benchmarks of success in Europe for VC’s. In a more difficult environment, they will become the minimum needed to secure a meeting with a VC.
3. Strong culture: strong team
In an interview with this author, David Cohen, founder of TechStars said “team” is the top three of six criteria they use when judging candidates for their accelerator programs. Ben Horowitz talks about the importance of creating a strong culture in his book, The Hard Thing About Hard Things, which he strongly believes is essential when building a successful business.
These aspects of leadership will make all the difference when things get harder. A strong team of A-players will work to keep a business going, especially if they are invested in the company and want it to succeed.
Founders need to create the best environment for their teams, which once profits are being generated will make the external funding situation largely irrelevant. So when we all start feeling the cold wind those who saw the signs will be safe and warm inside walls, they built themselves, brick by brick, rather than with the borrowed largesse of investor capital.