Startup Barometer: Ensuring Long-Term Success in a Complicated Market

By Jaidev Shergill, Managing Partner, Capital One Growth Ventures

For the past several months, we’ve heard talk in Silicon Valley and speculation in financial circles about a slowdown in startup funding and growing caution from venture capitalists, who are wary of the plight of “unicorns” and the unpredictable performance from a few high-profile IPOs. In our second Capital One Growth Ventures Startup Barometer – a semi-annual survey of technology startup owners and decision-makers – we went straight to the source to understand how tech startups are faring and what they are doing to ensure long-term success in the face of a less-than-ideal fundraising environment.

The Market: It’s Complicated
Before delving into the findings, it’s important to take a step back to understand the current dealmaking environment and consider the dynamics at play in Silicon Valley. Overall, and perhaps most telling, we have seen a measurable slowdown in the number of investment deals, particularly for seed-stage startups and – with a few exceptions – companies in later stages of funding. Venture capitalists are showing more caution. They are increasingly looking for more established companies to invest in, making it particularly difficult for young companies in the earliest stages to secure the funding they need to grow. According to Bloomberg, the first quarter of 2016 saw the fewest venture deals in four years, with a 12 percent decline in funding rounds since the fourth quarter of 2015.

For select tech giants like Slack, Lyft and Magic Leap, 2016 has been a good year, with major investments from VCs who are in favor of “safer” bets. However, $100 million+ “mega” deals in the U.S. have seen a steep decline overall, falling by more than 50 percent in the last quarter of 2015 (Source: CB Insights). Venture capitalists are seeking startups in the not-too-big, not-too-small “sweet spot” for investments.

Following unimpressive performance by several tech IPOs last year, we have also seen a slowdown in the number of exits as the IPO window closes. In 2015 alone, 79 startups received $1 billion+, unicorn-level valuations, but only 19 actually realized $1 billion+ exits (Source: PitchBook). Startups are being forced to scale back their ambitions and smart investors are now more inclined to set strict terms to help protect them in the event an IPO’s performance fails to match expectations. In a word, it’s complicated – and the landscape continues to shift day to day.

Silver Linings?
Despite speculation and hyperbolic headlines asking what this moment in time signals for the tech industry long term, there are bright spots among the gloom. For one, there is still a significant amount of money available on the sidelines as investors play the waiting game to see where valuations stabilize. In fact, new data from the National Venture Capital Association and Thomson Reuters show that 57 U.S. venture capital firms raised $12 billion in the first quarter of 2016, which is the most money raised since the second quarter of 2006 (Source: TechCrunch).

There are conversations happening inside VC firms about which companies and technologies to back, and investors will continue to reward the most innovative and promising startups with funding, though prolonged financing timetables will be a test for many. As we touched on in a previous blog post, a challenging economic climate can prove to be fertile ground for great companies to develop as entrepreneurs continue to deliver innovative technologies that solve big problems.

Through all of the ups and downs, corporate venture capitalists have and will continue to stay fully engaged in investments. From the end of 2014 to the end of 2015, corporate venture capitalists consistently participated in approximately 25 percent of global deals and remain both active investors and customers (Source: CB Insights).

Our Survey Findings
We wanted to understand not just what the current dealmaking environment means for funding at the macro level, but also if and how it is impacting individual tech startups across the country. In our second Startup Barometer, we took a look at what startup CEOs and decision-makers are doing to succeed in the midst of an unpredictable environment.

In our survey of 150 tech startup CEOs and decision-makers, we found that they are:

• Adjusting fundraising plans.
More than half (57.3 percent) of tech startups we surveyed said that they have altered their fundraising plans in some way as a result of the current economic climate. While 13.3 percent actually have accelerated their plans, others have raised or plan to raise a smaller round (31.3 percent) or have decided to delay fundraising (12.7 percent). Tech startups must be able – and willing – to adapt to industry changes and think strategically about their financing plans if they want to succeed.

• Hunkering down and conserving cash.
Two out of five (40.7 percent) tech startups we surveyed said that they have been advised by their boards to make budgetary cuts or cut down on expenses over the last six months. At a time when venture capitalists are being cautious about the rate and level at which they invest in new companies, tech startups must stretch their dollars.

• Focusing their recruitment and hiring efforts on technical talent.
Most of the tech startups we surveyed (80.7 percent) are planning to hire additional talent in the next six months. Among those planning to hire new employees, the vast majority are seeking out individuals who can contribute strong product development skills (86.8 percent) and those who have data science and analytics expertise (65.3 percent). Startup CEOs and decision-makers are focusing on technical talent who can ensure that these companies have strong products and services to present to potential customers.

• Presenting clear mission and vision statements.
No matter the state of the current fundraising environment, presenting a strong business plan can be the difference-maker that convinces a customer to take a chance on your business. According to the survey findings, 68.7 percent of tech startups have a business plan prepared for their companies, while more than a quarter (26.7 percent) reported that they are in the midst of developing one. Among those who currently have a business plan, nearly all include a clear mission or value statement (95.1 percent), a description of the product and how the company is differentiated in the market (83.5 percent), as well as a marketing plan and goals (79.6 percent).

• Zeroing in on customer needs.
We were interested in learning about how tech startups go about driving product innovation in their companies. Nearly three in four (73.3 percent) tech startups we surveyed rely on customer feedback to drive innovation and inspire new ideas, while more than half (54.7 percent) regularly test products with focus groups. While much is written in the news about trends and what people want from tech products, there is no substitute for candid feedback from consumers who have actually interacted with your product.

The tech industry is an ever-changing environment, and the rate of change calls on startup companies to be focused and nimble. By definition, as investors, we have a “vested” interest in the success of the companies in our portfolios and there are a range of ways – beyond their financial investment – that corporate VCs can add value. As we engage with tech startups, having a better understanding of the unique challenges and opportunities they face makes us more effective investors and partners. Barring a broader economic slowdown, we don’t expect a secular decline in venture capital markets. That being said, we would encourage every tech startup CEO and decision-maker to tread carefully in the months ahead. To succeed long term, the name of the game will be financial prudence, careful growth and a customer-focused approach to innovation.

You can learn more about the findings from the latest Startup Barometer here.