- Less than a year ago, venture capitalists were jockeying to get in on hot-funding rounds. Now, they’re saying that the balance of power has shifted, and startups are coming to them.
- 17 out of 18 VCs told Business Insider that venture capital investors now have the upper hand in the tough fundraising environment stemming from the coronavirus pandemic.
- Startup founders should prepare to deliver ‘flawless’ pitches that clearly explain their financial plans, and demonstrate how a funding round would extend their runway for the next 18-24 months, VCs said.
- Visit Business Insider’s homepage for more stories.
Less than a year ago, venture capitalists were vying to join funding rounds for hot startups. But the coronavirus pandemic has transformed the playing field: the market is still uncertain, unemployment numbers have spiked, startups are struggling, and once-abundant capital is now scarce on the ground.
The up-ended funding market has now transferred all the leverage to investors still willing to back early-stage companies, according to VCs.
We asked a panel of 18 VCs to describe how the balance of power has changed between startup investors and operators trying to raise new funding, as a result of the recent economic turbulence. Of the 18 people who responded, 17 people said that VCs had gained leverage over founders (9 of whom said VCs had gained “much more” leverage in the shift). Just one VC said that they had not observed any changes in the leverage that either party held.
The power shift could be costly for startups desperate to fundraise and extend their runways through the economic downturn, VCs warned. Four suggested that startups hold off on raising any funding unless it was absolutely necessary. Startup founders should “be ready for some predatory terms,” one VC told Business Insider.
Investors may not be willing to risk their cash unless they can secure an outsized ownership stake in the startups they back.
One VC said that startup founders about to pitch should “be prepared to be hammered,” by prospective investors, and that they should come with a “flawless” pitch. “The money is out there but it is harder to get and the equity take will be higher,” they added.
The responses of the VC panel members echo a trend that Business Insider has been tracking. While some startups have successfully raised funding and increased their valuations, the vast majority of startups are suffering drops in value.
Analysts have previously estimated that startup valuations could sink by as much as 33%, a projection based on data about valuation losses during the Great Recession.
Investors such as Sapphire Ventures President Jai Das, who was not a member of the survey panel, are also beginning to warn startups against fundraising now.
Das told Business Insider that startups are rushing to accept deal terms that swing too far in favor of VCs. These terms include guaranteed, generous returns on their investments, which could be harmful to startups in the event of a sale or an IPO.
But many venture-backed startups, accustomed to burning their cash reserves as they continue to prioritize growth over profits, now feel they have little choice but to accept those terms. Business Insider has already reported on European startups that have accused investors of threatening to renege on funding deals unless the startup agreed to raise the money at a lower valuation than the company had attained in an earlier round. This is known as a “down round.”
In the event that startup founders absolutely need to raise money under the current straitened circumstances, VCs on the panel say they need to up their game substantially. Such startup teams must not only introduce great ideas, but also present stellar pitch decks when pitching to investors, the VCs told Business Insider
Startups should be able to explain their financial plans clearly, and justify their claims that the proposed funding round would extend their runway for the next 18-24 months. And most importantly, they should be ready for their business operations to come under extra scrutiny, the VCs added.
Join the conversation about this story »
NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America