Navigating the Venture Capital Landscape: 5 Key Learnings for Startups from 2023
It has been quite a year in the early stage venture capital market. Less capital has been deployed to fewer companies; venture capital funding globally declined by 48% to $173.9B in the first half of 2023, per PitchBook data. Many funds sat on the sidelines while some deployed at a slower-than-usual pace. It was a harder year for many VC firms in raising their next fund as limited liquidity meant that Limited Partners were adding fewer new managers to their portfolios or re-upping with flat commitments instead of larger ones. The fundraising environment for founders looking to raise from VCs has been far different from what we saw in the heady days of 2020 and 2021.
All of that to say, for many startups 2023 was about survival, capital efficiency, and believing in the mantra that constraint breeds creativity. These periods of economic constraints have also proven to be phenomenal times to build innovative new companies. According to Cambridge Associates benchmark data, the IRR of fund vintages from recession years outperformed the previous three years during the last two recession cycles (looking at fund vintages 2001–2003 and then again at 2008–2010).
We have learned a tremendous amount this year from our deal flow and new investments and through our work with our portfolio of 70+ companies. Here are some of those key learnings as we look to close the books on 2023.
On Fundraising
Capital was expensive this year and harder to come by. Thus, 2023 was the year of the seed extension. This refers to an interim round of capital prior to the close of your next priced round (e.g. funding between Series Seed and Series A in this case). You might hear these called seed extensions, seed+ rounds, or Pre-A rounds (I wrote about them here). In 2023, across the market we have also seen more companies raising SAFE notes than priced rounds and at valuations ranging from flat extensions to the last round to increases in valuation caps to some down rounds as well.
The journey to build a venture backed business and scale it through to exit takes many years and often many rounds of funding; it’s important to take the long view in a tough economic environment and remember that this year is about survival for some businesses until both the funding and sales environments pick up again.
Tip: The early stage market shows signs of opening up, but expect this constrained environment to continue into 2024. Plan accordingly by allowing more time to raise your next round (and it’s okay if it’s an extension!).
On Traction & Goal Posts:
The goalposts have changed for both Seed and Series A rounds. While there is certainly no one-size-fits-all revenue milestone, we’re seeing seed rounds where companies are generating $250–500K in ARR and Series A rounds more in the $1.5–2M ARR range. Equally important to revenue traction has been rate of growth (targeting 20% or more month-over-month growth). In a tough macro environment, companies having the most success focus on unit economics, showing repeatable sales motion and process, logo retention, and revenue diversification across logos. For example, a company generating $1.5M in ARR may still find they have a hard time raising if that revenue is concentrated in 1–2 clients.
Tip: These goalposts are likely to stick around for a while, so recalibrate your goals for business metrics tied to your fundraise. When building your GTM process, focus on testing, measuring, launching and iterating quickly.
On Operating in Constraint
“What’s your burn reduction plan?” was a popular phrase in VC vernacular this year. For early stage venture-backed companies, runway after a new round of funding is typically 12–24 months. Founders are asked to do an extraordinary amount during this short window before needing to raise again mid-way through.
A big theme of this year for some companies has been working toward a path to profitability/breakeven to have the optionality to raise venture capital again or to not. We worked with a number of founders this year who reduced operating cost significantly — some to the tune of 40% or more — and we saw some incredible innovation in the face of constraint. In one case, once stripped back to the bare essentials and first principles, the product pivot that resulted led the company to 15X revenue and profitability. The adage “constraint breeds creativity” certainly remains true.
Tip: It’s important to balance preserving cash with enabling growth, so be careful not to cut back too deeply to the point where you can’t grow. Test and identify core growth levers and focus on those.
On Sales/Revenue
We invest in a range of businesses, primarily B2B and focused on enterprise saas, foodtech, and digital health. In this economy, consistent sales and growth are more important than ever. One of the biggest lessons I’ve learned is around when and how to offload sales as your organization grows. Don’t offboard sales too soon! Founder-led sales are very appropriate at the seed stage. When an influx of funding comes in, it can be tempting to hire someone to build out a process, scale up a team, and run full speed. We believe that the right time to staff up a sales team is once you’ve honed in on a repeatable sales process, understand your ideal customer profile (ICP), and are closing business repeatedly. We love to see founders remain involved in sales, even with a team in place.
Tip: When you’re ready to staff up the team, make sure you have marketing resources one step ahead/in lockstep so that you can successfully convert leads.
On Communicating in All Seasons
My biggest learning this year is to communicate — consistently and transparently — in all seasons. This certainly applies to fund managers like myself communicating with our LPs, and equally importantly it refers to founders communicating with their investors.
- Treat every investor with the same respect and transparency up and down your cap table. Resist the temptation to only update your large institutional investors as you grow. Angel investors and smaller funds were the first to believe in you, and they can be incredibly helpful throughout the journey with bizdev intros, investor intros and references, and sometimes, additional capital (especially in a quick bridge round).
- Send a monthly written investor update (here’s a template we like) consistently, tracking the same KPIs and metrics month over month. Share equally the good news, the bad news, what’s keeping you up at night, and what help you need. Be as specific as possible on this last point — do you have a dream customer wish list, a target investor list, an ask for candidate referrals, etc. Help your investors know how to best help you.
- It’s challenging when a portfolio company goes silent (we assume it’s not good news) and then resurfaces in a fire drill with two weeks of cash in the bank. I empathize with the temptation not to share bad news that might disappoint, but rest assured that your investors are part of your team and truly want to be in lock step, no matter what the challenge.
Tip: set a recurring calendar reminder to send a monthly written investor update. My favorite format is a simple email with bullet points that track the same headlines/KPIs each time (Highlights, Lowlights, Product/Utilization, Revenue, Runway Remaining, Help Needed). It doesn’t need to be fancy or take you an hour to compile. Consistency is key.
2023 has been a year of learning, building, and continuing to grow. We learn from each failure and each success on the journey of entrepreneurship. While it’s been a challenging time in the macro, iIt’s an amazing time to be building and investing in early stage tech. We’d love to hear from you and meet you; each member of our Bread & Butter Ventures team hosts open office hours weekly which you can book here.
