The context of fundraising, which young shoots have made a specialty of, is at half mast. More complicated negotiations, valuations that melt like snow in the sun… Worrying for the founders, of course, but simple return to normal say the experts and the investors.
The current economic crisis is affecting tech start-ups just like any other business. However, it is generally not so much soaring energy prices or the fear of a lack of customers that alarm them at this stage, but the prospect of more difficult financing. As we know, a lot of young shoots evolve on the model of fundraising: to develop, they raise funds from investors in exchange for shares in the company. This allows them to have the necessary funds to create their product, hire the first employees, ensure marketing and development.
The current economic crisis is affecting tech start-ups just like any other business. However, it is generally not so much soaring energy prices or the fear of a lack of customers that alarm them at this stage, but the prospect of more difficult financing. As we know, a lot of young shoots evolve on the model of fundraising: to develop, they raise funds from investors in exchange for shares in the company. This allows them to have the necessary funds to create their product, hire the first employees, ensure marketing and development. But if in recent years, the proliferation of structures (private and public) and business angels has made money much more accessible, the current crisis is clearly changing the situation. “In theory, we should raise funds in 2023, but the context is clearly not good, admits this entrepreneur at the head of a Brussels start-up. We are going to do the big back during the coming year and will consider later a fundraiser.” This strategy, this start-up that markets software as a service (subscription software) can afford it because it has recurring revenues and some reserves from its previous fundraising. And even if the company is not yet profitable, its founders have agreed to reduce investments that would have ensured maximum growth. “When we saw the context, we quickly prepared a plan to extend the runway, that is to say the duration before running out of cash, slips us this young boss of a box more of 10 people. How? By refocusing on the heart of our business, by eliminating risky bets and by having a much greater financial discipline. We have also postponed strategic decisions such as the opening of new markets or the launch of new products or functionalities. The idea is really not to take any additional risks.” Other structures, however, go even further in their need to curb their expenses, in particular reducing the wing among the teams. It’s because the economic situation and the outlook are worrying the various ecosystems… “The market that was in the hands of start-ups is now in the hands of investors,” observes Frank Maene, managing partner of the Volta Ventures fund. Understand that from now on, it is no longer the start-ups who dictate the law but those who allocate the funds. After two years during which start-ups had no trouble finding money and enjoying huge valuations, things have now completely changed. “It’s not that there is no more money, notes Frank Maene. He remains available but investors no longer inject him so easily and no longer sign terms sheets after only two meetings. Now everything the world is much more cautious.” It is true that in the midst of the covid period, when digital was showing its full importance, start-ups were spoiled for choice and no investor wanted to miss out on a good file. Today, caution seems more appropriate on the side of venture capital (risk capital) and funds. With, as a consequence, a real gloom among entrepreneurs looking for financing. “It is an obvious reality, points out Thibaut Claes, investment manager at SRIW. Many negotiations today disappoint the founders, either because the amounts they can raise are revised downwards, or because the valuation of business is significantly lower than expected.” For this tech entrepreneur in full fundraising since the beginning of the year, the context is therefore not simple. “Our negotiations take a very long time, he admits. And unfortunately, time is not on our side. When the stock markets tumble or Putin makes new threats, we suffer the consequences. review the conditions as time goes by. As we get closer to an agreement, the conditions are no longer the same as those at the start of the year, both on the KPIs (key indicators of performance, Editor’s note) operational and financial to be respected for them to invest, than on the valuation of the company.” This large scale-up would have seen its new valuation melt by 20% in a few months during the negotiations. Admittedly, thanks to the very strong growth it is posting in a rapidly expanding sector, the company seems to be maintaining an attractive valuation, up from its very ambitious previous round. But others are much less lucky, suffering real down rounds: this means that the valuation of the box has melted between two rounds of financing, being less valued during the next round, which is not without problems. Especially when the drop is particularly significant. This summer, the iconic example came from the Klarna scale-up. This Swedish fintech saw its valuation melt by around 80% during its last funding round! International stars like Stripe or Instacart have also suffered strong discounts. These down rounds even make Thibaut Claes say that today, “many unicorns, these unlisted companies valued at more than a billion, have lost this status”. Hard to say, of course: start-ups usually so inclined to communicate about their fundraising in the press now refrain from revealing their half-hearted operations. The current reluctance of investors is not unfounded, based in particular on the possible lack of outlets for their young shoots. “A lot of investors realize that the rounds of the last two years have been negotiated at far too high prices and that they lose their feathers, analyzes the investment manager of SRIW. They then pay attention and are more selective and cautious.” It is that the final objective of the investors rests on the sale of their shares, either during subsequent rounds of financing, or during the resale. But if the valuation of companies is down, they may not find their way, and the situation could prove tragic for the founders. In the event of down rounds, the investors who have provided for the ad hoc clauses will indeed first want to recover their bet, forcing the entrepreneurs to absorb the shock, at the risk of not making any capital gain, or even coming out the losers. And in the opinion of the experts interviewed, there is absolutely nothing theoretical about this prospect… However, if many start-up entrepreneurs maintain that the financing market is undergoing an “unprecedented tumble” and a maddening situation, instead, experts (and investors) point to a return to more normality, after a moment of irrational surge in investment in the sector. “It was the previous two years that were absolutely abnormal,” insists Frank Maene. And Thibaut Claes to display the same position: “The context of previous years was out of all logic. We saw huge valuations for really very weak companies. Moreover, if we look at the evolution of valuations and amounts invested over the years, we see that the years 2020 to 2022 were exceptional. Today we are returning to a more realistic and much healthier approach.” Healthier in the sense that investors will once again look in more detail at the real business of start-ups, and no longer just at their future promises. Nascent start-ups, those in difficulty and those that have not met their announced objectives may therefore not be in a good position to extract strong valuations and minimize their dilution. Even to find cash. On the other hand, those who are able to show investors the growth of their business and their income should not encounter too many problems, even if the negotiations on their valuation are likely to be more tense. We will still discover very positive deals, especially when companies already have growing revenues and can show a plan for profitability. “Growth at all costs” which is no longer accepted (or rarely) and investors who are beginning to worry more quickly about profitability… Not so abnormal, after all.