What does this mean for entrepreneurs and investors?
Even as we work through this market downturn, this is not the time for entrepreneurs to lick their wounds. Entrepreneurs should instead continue to network and build their businesses. We suggest they consider the following three points:
- Fundraising will not be easy in the months ahead, so before you seek new funding, look for ways to free up working capital to extend the runway of liquid funds.
- To that end, entrepreneurs should carefully scrutinize any major investment, new building, major hiring spree or general expansion. Without a clear and obvious high return on investment, it’s not worth the risk. This is the time to focus on serving customers and adding value.
- Conversely, this could be a good time to add talent. As overextended companies trim their head counts, entrepreneurs may want to look for opportunities to recruit high-impact talent as the job market loses some of its tightness.
Finally, companies engaged in fundraising should challenge themselves to be even more efficient in terms of performance. If you’re not getting any traction with investors, refocus on customers and execution. Achieving good results in tough times impresses investors.
From an investor perspective, investors are focusing on what is already in their pipeline, as opposed to new opportunities. We expect many investors to take a pause through the next few quarters and be much more selective.
Overall, we expect Q3 investments to be lower than Q2. In this current environment, the fear of missing out is gone, and investors can now afford to wait as they review opportunities.
Looking at the rest of the year, we estimate venture-backed companies will raise some $225 billion in 2022. This is not all doom and gloom. There has never been more dry capital to fund innovation. We expect transformational companies to emerge, as we usually see in down cycles. Tough times are often when true leaders surge forward from the pack.
