1. Over the past decade, the size of funding rounds has remained stagnant and the number of transactions has declined. To the untrained eye, it looks like there’s more competition for startup dollars. Beneath the surface, however, startups are recycling the experience of founders. The reason the number of deals has gone down is because teams are better prepared, are more financially savvy, have access to cheaper support, waste less time and resources, use other forms of funding BEFORE boot cycles and pivot or decide to exit earlier – at the pre-boot stage. (Founders will jump into exploring new opportunities).
The founding teams are recycled
2. More companies seeking funding rounds already have sales, expression of interest and some form of market validation through the circular economy of entrepreneurial mindset and action . Companies seeking funding rounds are more advanced than 10 years ago. Founders use other means to fund themselves (as they should! Because seed funding is very expensive!), AND they also recycle experience from founding, co-founding, board and/or early employees of previous companies. This creates a circular economy of entrepreneurial experience. Not just serial entrepreneurs, but a large number of people who have experienced startup development (failure, success and everything in between, in so many roles!).
Supplier funds are recycled
3. More investors are participating in each round, and seed rounds have become more collaborative. More and more small funds, angel investors and groups of angel investors are co-investing. This means that more eyes evaluate (GOOD) deals but also BAD deals come through because the impact of each deal in the overall portfolio is lower, and FOMO (fear of missing out) can get that signature! Think Theranos (ouch).
TIP: Nobody talks about the herd mentality and there will be lessons to learn in the future. Due to the cyclical and recycling nature of funding, early investors are able to scan deals earlier, with lower amounts, and, if they want to play in future rounds, they must enter early and with greater others: pay to play.
The retraining of founders and funders also changes the outcomes:
4. Outputs are also recycled! Companies are being acquired, taken public, broken into pieces, resold, privatized, republished, and there are many exit opportunities emerging. This is actually an area prone to disturbance. Welcome to the world of recycling outlets.
And the financing process has become more interesting and complex.
5. As entrepreneurs and funders become more comfortable navigating many startup or adult funding options, new funding options are emerging: there is increased knowledge of crowdfunding, cryptocurrencies, hybrids (safe deposit boxes/convertible notes) and SFI types (can we call these special financing instruments?). Capital providers borrow mechanisms from SPV, SPE and SVI. I can’t wait to see what new options will come out of it.
All of this recycling and repurposing has an impact on ROI and capital markets
6. Cycles are longer: It takes longer to climb a bigger mountain, especially if along the way there have been near exits, pivots, more and bigger turns. It impacts how we negotiate funding that comes into the business, because there is light at the end of the tunnel, but the tunnel is getting much longer. Combine that with the uncertainty of how investors are exiting. Again, this is an area ripe for disruption and I look forward to seeing new options emerge. With longer cycles, the return on investment decreases, so companies are pushed to find new and disruptive ways to excite investors and NEW investors who are supposed to be more risk averse and adventurous, but who are in reckless reality.
Longer routes require more resources,
But the supply of capital does not exist in a vacuum
7. Public markets are shrinking and investors – especially institutional investors – are riding a roller coaster of political madness. Mainly derived from the surprising interest in protecting borders rather than having healthy global economies, financial and economic illiteracy permeates the political arena where decisions are reckless and financial managers focus on dumb risk reduction ( gasp) instead of creating and sustaining new wealth.
Overall, a combination of healthy retraining of talent, capital, and technology fuels the economy despite policy mistakes.
For investors, the signals are clear: get in early, support lots of startups, learn and collaborate.
For entrepreneurs, the signals indicate: use many forms of financing, use dynamic financing, seek support from investors (not just money), and create dynamic teams.
Oh, and for those small business owners who think “small is beautiful”, now, more than ever, my famous quote of 100% of 1 is 1, but 1% of 1000 is more, is more valid than ever. Get in line, ditch the illusion of a “safe” and embrace the “growth” mindset. If we stop growing, we start dying. Small IS beautiful, it’s just not durable.
For government and economic development agencies, the puzzle is getting more and more complex… Hang in there!
We really don’t know what we are doing, but we are doing it!