As entrepreneurs navigate the current fund-raising environment, investors have advice: Make sure you’re managing your cash.
Startups across the country are competing for capital in a tight funding market that’s forcing some entrepreneurs to consider down rounds – raising capital at lower valuations than previous fundraises.
Data recently released by Carta, an equity-management platform, showed venture capital is still down 58% year-over-year. And 20% of all rounds raised in the second quarter through Carta were down rounds, the second-highest quarterly figure of the past five years, according to the company.
To some degree, the regional startup scene is feeling that national trend. It’s prompted some to raise smaller bridge rounds, focusing on existing investors, or raise with “less preferable” terms than they’d like, according to Jack McGowan, executive director of the Western New York Venture Association/Buffalo Angels.
“There have been companies that have had challenges and have had to adjust accordingly,” he said.
Although Western New York doesn’t have the same type of fierce competition as larger markets, the area has experienced a higher bar for securing funding rounds. While there may not be a lot of huge down rounds, there are flat or slightly down rounds locally, according to David Brown, managing partner at Impellent Ventures.
Regional startups are typically already pretty frugal, but in this raising market, now is not the time to overspend on experimenting with research and design unless there are valuable dividends.
“The likelihood of raising money is lower, so you’ve got to kind of go to Plan B and look hard at your expenses and really focus on generating revenue as quickly as you can,” said McGowan.
Sign up for Business First's daily newsletters to get the best business intelligence in Buffalo sent straight to your inbox.
In many cases, software is the biggest business cost. But for companies already bootstrapping conservatively, unfortunately, sometimes short-term cuts on the staffing side might be necessary.
There are silver linings. Impellent Ventures is as active if not more active than it was six to 12 months ago, according to Brown. The Rochester-based firm typically writes 12 to 18 $500,000 checks per year.
“I think now is a particularly exciting time to start and grow a business,” he said.
But the group is being more cautious about rounds being completely filled out before it wires checks so that founders aren’t left with 12 months of runway when they really need 18 months' worth, he added.
And many potential investors are likely being more careful right now, even early stage investors, according to McGowan. If a startup is raising a seed round but its business model requires raising another round in six to nine months, it’s going to be more difficult to get seed funding.
The Buffalo Angels investing approach hasn't changed, McGowan said, because the gorup has always taken a traditional approach to investing when doing due diligence and paying attention to cash flow.
The group has approved three deals within the last two months.
“We don’t generally invest on the assumption that they’ll be able to raise more money in the relatively near future,” he said. “We want to see they’ve got a sound business model.”
In the second quarter of 2023, the “Northeast” region, which includes New York state, rose from 26.8% of all deals to 29.9%, according to Carta.
However, Business First's analysis showed the first half of 2023 has been slow for startup funding in Buffalo. January through June of this year, seven local companies have acknowledged private, growth-oriented rounds of funding. Together, the funding totals about $19.41 million.
That’s a stark difference from this time last year, when 19 startups had raised a total of about $140 million.
