Startup Age vs. Venture Funding: Debunking the Myth and Exploring the Hidden Factors
A common belief exists among founders that the length of time a startup has been in business adversely affect its ability to secure venture funding. At Impression Ventures, a Seed to Series A fintech fund, we’re occasionally faced with this question. The answer is not as straightforward as you might seem.
While it’s true that older companies might face challenges when seeking venture funding, it’s essential to emphasize that it’s not their age per se that causes the problem. Instead, it is the accumulation of issues that can come with age — such as former founders, IP issues, slow growth and broken cap tables, just to name a few — which may impact their chances of securing investments. In this post, I’ll delve into the various factors that may affect a company’s venture funding potential as they age, and explain why age alone does not discourage us at Impression Ventures from investing.
Age: A Misleading Metric
The age of a company is an arbitrary measure that should not be viewed in isolation when evaluating its potential for success. In fact, some businesses with a longer history of success may provide more stable investment opportunities than newer startups. At Impression Ventures, we understand that each company is unique and requires a tailored approach when assessing its value and potential.
The Real Issues: Accumulation of Challenges
As a company ages, it may face a series of challenges that can complicate the investment process. These are the real factors that may hinder a company’s ability to secure venture funding, rather than its age.
- Former Founders
As a company matures, it may have experienced changes in its leadership or founding members. While this is not inherently negative, it can lead to control problems or ‘dead equity’ — complicating decision-making, communication, and the overall direction of the business. Investors may be cautious about the stability of the company and its potential for growth under these circumstances.
2. IP Issues
Intellectual property (IP) is a critical factor for investors when evaluating a company’s potential. Over time, a company may encounter IP-related issues, such as ownership (aka who actually owns the IP of the company), licensing challenges, or instances of infringement. Especially when care is not taken in the early days of the business to properly document ownership with binding contracts. These issues may be seen as red flags to investors and could impact their willingness to provide funding.
3. Broken Cap Tables
A broken cap table — one that is overly complicated and where the founders own too small a portion — can be an obstacle for potential investors. Older companies may have complex capital structures due to multiple rounds of funding, changes in share ownership, and varying valuations. This can create difficulties for investors when determining their potential return on investment and may lead to a lack of interest in funding the company.
4. Growth
The biggest red flag for older startups is growth. If founders can’t explain why the company has been around for as long as it has without seeing significant revenue growth investors will ask themselves if this lack of growth will continue post investment. Founders should be prepared to address this.
Conclusion: Assessing the Bigger Picture
At Impression Ventures, we firmly believe that age itself is not a determining factor when it comes to investing in a company. Instead, we focus on the overall health and potential of the business. It’s essential to acknowledge the accumulation of issues that may arise as a company matures and be prepared to assess, and if possible diminish, their impact on the investment potential.
Our team is committed to working with companies to navigate these challenges, offering guidance and support to overcome the obstacles they may face. By doing so, we can help older companies realize their full potential and continue on a path of growth and success.
Remember, age is just a number — it’s the bigger picture that truly counts.
