The uncertainty that exists today in the market is driving changes in approach for both early-stage entrepreneurs and investors. For five years in venture capital, valuations more than tripled and record amounts of capital were deployed. On the heels of this ridiculously strong activity, says JumpStart Ventures President Jerry Frantz, is an uneasiness that creates caution.
“What's happening with investors is they're taking a pause that valuations are coming, maybe not so much that they're dropping, but coming back more to reality," Frantz says. "Patience, pausing; that's the main reaction that we're seeing in the venture community.”
Businesses that are a little later stage and are raising large amounts of investor dollars on a strategy that focuses on growing the top line are facing a market that has essentially put on the brakes, he says. If the company needs to raise cash, and has no other option than to raise money to continue that growth, they're not in good position. The businesses that are growing more sustainably in these conditions are those that have a more balanced approach to business. Timing is also a factor. Companies that have raised a good amount of money and can manage their burn rate have more runway to push against the headwind.
No one is sure, he says, if a recession is coming, how long or how bad it might be. And that creates a different level of anxiety.
"That manifests itself, in terms of investing, looking more at the fundamentals of good deals and trying to understand and trying to plan for things that aren't going to be needing tons of capital, things that are going to exhaust dollars or runways that are going to be short, because you don't want to find yourself needing your portfolio company to raise significant capital when it's actually going to be worse in the future than it is today," he says.
Entrepreneurs, he says, should understand and anticipate that what they may have expected, whether they're just starting their early round or if they're moving through the stages into a later round, is that the market is not the way it was. Investors, now, aren't as focused on companies that are growing and grabbing market share, but rather are looking at companies' bottom-line performance and what they're doing to conserve cash.
"Knowing that that's the lens that is being looked through today is important for the entrepreneur to make sure that they're addressing that," Frantz says. "They can show a credible plan. They can show an appropriate use of capital. That they should understand that it could take longer to raise additional money. That's the perspective that they have to approach the market with today because if they, in any way, think that it's going to be the way it was in the last couple of years, it's not."
Frantz spoke on the Smart Business Dealmakers Podcast about how the early-stage investor mindset has been affected by market uncertainty and what it means for entrepreneurs.