Tech startups looking for capital are facing difficulty in doing so amid a nationwide downturn in obtaining investments, though founders who can adapt and act quickly could prove to benefit most amid a tightening in the market.
That was one of the main themes identified and discussed by a panel of Pittsburgh-area investors who spoke during an event hosted by Innovation Works Inc., one of the region's largest seed stage investors for local startup companies. Ven Raju, chief investment officer at IW, hosted the discussion, which touched on different approaches founders can take while trying to raise money for their companies.
"[Venture firms] are looking for good deals," Raju said. "Historically, a lot of these venture firms — whether investments in Uber or Facebook, you name it — they were generally made at downtimes and so there is a real opportunity here, both from the investor side as well as the entrepreneurs' side in terms of forging deals."
According to panelist Kelley Skoloda, founder and CEO of KS Consulting & Capital LLC, it seems that the game of investing itself has changed a bit and startups that can establish traction — be it sales or the reaching of new milestones — is a key metric investors want to see before they offer up their capital. Skoloda said her firm has since altered the way it evaluates startups looking for investment to prioritize those that have established traction.
"When we looked at these companies during Covid, we really changed our criteria," Skoloda said. "You see that a lot of startup companies pivoted, but I felt like our fund pivoted. So instead of using our basic criteria that we did for a couple of years, we started to think about what would it take for someone to survive through Covid. And then every couple of months, we kind of looked at our criteria and said, we need to better change it to make sure that we're reflective of the marketplace so our criteria continued to evolve."
Panelist Craig Markovitz, former founder & CEO of Bluebelt Technologies, described himself as "a big advocate for traction." He also said there was never an easy time to raise money for his startup. Building value and building a company is just hard on its own, he added, but rewards are often given to those who put in the effort to see their startup succeed.
"Great companies with great ideas and great solutions that solve customer problems in meaningful ways will still be funded," Markovitz said. "Great companies with great solutions that solve customer problems in meaningful ways with high-performing teams will still figure out ways to overcome obstacles and keep moving forward. The whole trick in being an entrepreneur — the whole trick in being a leader in an organization — is coming up against those obstacles — working with your team, your colleagues, your network, overcoming those obstacles — until you meet an insurmountable obstacle, which doesn't happen as often as you think."
As startup valuations fluctuate, investment firms are taking note to try and come up with a deal that's beneficial not just for their side but also for the founders themselves. But reaching such figures is not an exact formula and it's one that's also been subject to adjustments just like valuations themselves.
"We just look at kind of the motion of where the average or median valuations are, and we try to negotiate with that because we want a discount and we hope you exceed it and you blow up; we make a lot of money and you make a lot of money," Will Allen, partner at Magarac Venture Partners, said as a panel member. "That's kind of a bare-bones of what it is. But there has been some pullback in valuations, not much. From where we sit, prepandemic and even now, they're kind of about the same. They're obviously higher along the coasts but we invest across the Midwest so we're always going to get an efficient valuation."
Allen said despite the fluctuations in valuations, he and his firm are seeing founders "get smarter" with their unit economics and their process.
"I think that's the biggest thing," Allen said. "If you don't have a process, you don't know what you're doing. You got to really think about that and it's hard if you've got this great idea — 'yeah I have this radical idea' — but be really pragmatic about your execution."
Tim Meyer, managing director of private capital solutions at Cowen, and Matthew Weinbaum, shareholder at Dentons, completed the makeup of the five panelists, who spoke for nearly two hours during the event.
