Blog – Back to Basics

0: Back to Basics

This is one of those historic moments when fundamental resets occur. Getting investment is going to get harder before it gets easier.

Rising interest rates and the collapse of Silicon Valley Bank (SVB) leading to its take-over by the US Government, have been shocks to the startup ecosystem. Gone is the era of cheap capital and lofty valuations. For investors the focus has changed. Jeff Diehl, Managing Partner and Head of Investments at Adams Street is quoted in a BusinessWire report to have said:

"Investors have indicated they are seeking resilient companies with pricing power, meaningful share in growing markets, strong balance sheets, and a clear path to profitability."

Not all businesses are true fast growth startups, and even if they are, many should stay away from venture capital firms (VCs): they really should try and fund themselves by generating cash sales — selling their stuff to customers who actually want it. One company I support as an angel investor started by taking small stakes from customers (who have actually tried their product and love it) in exchange for equity — all quite legally and within the tax code — and supplemented it with bank loans. Another company used the Wefunder platform, again receiving funds from accredited investors for royalty promissory notes. These investors are true stakeholders: they not only own a piece of the company they invested in, but they buy the products, and act as evangelists for them, thus helping the business directly by growing sales.

Many companies, in truth, are properly hobby, lifestyle, or very small businesses that will never be scalable startups. And that’s OK: many small and medium enterprises (SMEs) generate sustainable sales revenues and healthy profits. Many investors have been foolish in treating nearly every new company they are pitched as startups, all worthy of financial support without conducting scrupulous due diligence.

For some investors, the thesis seems to have been to ride the latest tech fad and throw capital at any new business in the space. It’s an extraordinarily high risk approach, more akin to gambling, given the terrible odds of success. Conventional wisdom is that only 10% of startups succeed and go on to make a profit or pay back their early investors in full. Remarkably, no market need for the new product is the Number 1 reason why startups fail; 7 out of the Top 10 are sales/marketing related according to a survey of CBinsights in 2019. Paul Graham, founder of Y Combinator, said it best:

“If you make something users want, you'll probably be fine, whatever else you do or don't do. And if you don't make something users want, then you're dead, whatever else you do or don't do.”

To secure funding from banks or investors, it has never been more important that a startup’s founder team validates the product/service concept for product/market fit and the appeal of the offer to early adopters in the market. To gain insights into how to do it, read this series of blogs and contact us at TYLIPH Partners.

Lindsay Powell is a Partner and Co-founder of TYLIPH Partners, which offers its clients access to people with actionable insights to position new tech companies for long-term success.