Protecting Your Startup During an Economic Slowdown: Leading US & Canadian Investors Share How to Navigate Changing Valuations

Canadian Investors 2023

Many startup founders have asked us, as investors and accelerators, the path to weathering this economic downturn. We curated a list of US and Canadian seasoned investors to convey their perspectives on the state of the market and what this means for valuations, resource allocation and raising money during this precarious period.  

By Taylor McAuliffe and Hessie Jones 

This article is part 1 of 3 in our ‘Investor Advice in a Down Economy’ series.  

Founders have a responsibility to notice the signals of the changing economic environments. The prevailing economic downturn is signaling, in many cases, that founders cannot rely on business as usual, the way it has been over the last 12-24 months. Money is tighter, and investors are going to be more selective. However, if founders keep their eyes open, there is a momentous opportunity to flex business strategies and make prudent decisions about how to utilize and prioritize resources and come out on the other side. 

This current market has spurred the investment community into correcting prices that have suspended reality, in many cases. Inflated valuations, a seemingly endless well of funds and VC spending frenzy – all were predestined to end.

Gayatri Sarkar, founder of Advaita Capital, a firm which invests in growth-stage technology startups and is focused on celebrating diversity and championing the voices of women and diverse GPs and LPs, explains what led to this downturn:

“We saw COVID put a stress test on our supply chain in every way like food and medical supplies. It also puts a stress test on socioeconomic power, and the stress test on human emotion from isolation to unemployment. A slight recession emerged as a sharp drop and a sharp rise because of the government stimulus. This stimulus effect brought free money that came into the system that helped fuel spending. And it came into all different layers of the system… that enabled more investment in tech, influencing people to raise more and increase the valuation of their companies.” 

What Sarkar has described is the resulting free flow of money that saw companies raising every six months and much higher valuations at more unwarranted rates. What this means? 

“There was a time when unicorns were called unicorns because they were barely found. Now they are everywhere. So, everybody is running a unicorn! So now where is accountability?” 

Down rounds are expected so build a good company, mitigate risks, be mindful of the value you are creating, and you will be the cream that rises to the top.

Jessica Peltz-Zatulove, founding partner of Hannah Grey VC and Cofounder of Women in VC, challenges founders to think two chess moves ahead: 

“Venture Capital and business planning is not only thinking about what valuation can I grow today, but also what valuation can I 2X or 4X in that 12-to-18-month period. Founders should be thinking about what an appropriate valuation for me is based on domain expertise, customer pipeline, market opportunity, and business traction that the business will be able to grow into and exceed. Additionally. It’s being mindful of a valuation they’re comfortable with regarding the dilution they will need to take.” 

Neeraj Jain, General Partner of MATR Ventures, a seed stage fund which invests in underestimated founders: women, Black, Indigenous, People of Color (BIPoC), LGBTQ2S, and Neuro-diverse communities, concurs that there will be less appetite for risk. The bloated valuations of the previous year will naturally mean there will be less competition from VCs trying to get into deals. His advice is the same whether it’s an up or down market,  

“Build a good company. Focus on the obvious things: revenue, costs, the team… what kind of IP do you have? Are you disrupting the market? I think one of the things that’s going to change is that money will be a little bit harder to get so now you are going to have to show more traction than before… it is really about the package: What actual value are you creating? And that needs to be real.” 

Julianne Zimmerman, Managing Director, Reinventure Captial, which invests in US-based companies led and controlled by BIPoC and/or female founders of all identities, says that founders should think less about valuations and focus on the direction the company is on, how they are accessing capital and the most appropriate terms that track to their objectives: 

“What I always encourage founders to do is to think ahead about all the capital you will expect to raise: equity, debt, whatever capital you will expect to raise to reach your objectives. And then think about how you want to position the company at each of those junctures such that the capital you’re taking in really puts you on the best possible trajectory, not only for the next milestone, but on path to that ultimate objective.” 

Danielle Graham, Managing Partner of Phoenix Fire and Cofounder of The Firehood, an angel fund and network focused on women in technology, emphasizes the need for founders to know who they need to target for capital. 

“One positive side – the type of people who may be looking to reinvest their capital in alternative assets will be more incentivized to participate if they have access to high potential technology startups. When people become risk averse, they use an economic downturn as an excuse to not participate and take that risk for the potential upside, whereas an intelligent investor, in comparison, would participate.”  

For the founder, Graham notes they need to be open to new considerations at this time when dilution will be of greater concern if the founders raise less capital.  

“That will obviously lead to more post funding strategies that will mean being frugal with your capital, managing cash flow, curtail hiring and giving employees confidence during this downturn. Watch spending and give yourself as much runway as possible because you are going to have to survive through this funding scarcity.” 

Shirley Speakman, Senior Partner, Cycle Capital, an impact investment company focusing on cleantech, describes the VC appetite to put capital to work in new entities is going to wane because they will need to focus on the health of their existing portfolios. For founders, the key to survival is risk mitigation and cash management: 

“Do as much as you can to mitigate the associated risk, so make sure that you have revenue coming in, that you have longer term contracts, that you can do whatever you can with the business that you must give the potential investor more confidence that the risk is controlled. And manage your cashflow like there is no tomorrow – have strong control over your cash forecast. Understand when revenue is late, and its impact on payables and overall cash flow. Know what levers to pull you through this time. People hear that and they often say, ‘Okay well then, I must cut [staff].’ You cannot cut bone because you lose a limb when you are trying to recover, so it’s important to be judicious and prudent with your cash.” 

Founder and Managing Partner at Preference Capital, Andrew Opala, indicated that while down rounds may be inevitable at this time, the key is ensuring your round is always better than the last one; your valuation is higher, and you’re good! 

“Airbnb had a down round when there was a market downturn, and they crushed the ownership. Now they’re doing well! Founders don’t want to risk everything that will make the company go under because they valued it too high, thinking they were going to roll through this. There is no problem with including ratchets in your valuation that allow founders to get back investor shares if they reach specific valuation milestones.” 

All agree that cash is king. Jain, of MATR Ventures, emphasizes focus on increasing revenue: “Can you launch something a little earlier than you originally intended to? Can you put a premium version out there to increase your price?” Sarkar adds that if you benefit from having a large injection of capital you need to focus on making excellent operational choices while reducing the burn rate and having the net dollar retention.  

Alaric Aloor, General Partner at MATR Ventures, also recognizes the “exceptionally bloated” valuations in the last few years. This downturn, to him is a contraction where money is no longer easy to attain. This period is a reckoning, and he believes the “cream will rise to the top.”  

For a founder raising in this contracting economy, it is important when you approach potential funders to show them the sum of all your resources … talk about your intellectual capital, your technology, your brand value and financial assets you bringing to the table. And because there is no universal universally accepted formula to determine the valuation, we must start with the amount that you may want to exit with, factoring in the expected return on investment, the amount the founder invests, and the stock holding percentages that we want to negotiate with the founders to arrive at this this pre money valuation.” 

The original version of this post first appeared on Forbes

Stay Tuned for Part II of our series.

Valuations are a critical component of pitching your company to potential investors. Our Investor Readiness program focuses on helping you build a pitch from the ground up. Learn more about our upcoming cohort and application deadlines here. 

Learn more about how Altitude Accelerator works with founders:


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About

Shirley Speakman, of Cycle Capital, recently hosted a session for our Investor Readiness program about valuation, guiding founders through the fundamentals of data room creation and management, how it ties to valuation, and the importance of cap table formation in all support of getting a good deal completed. Speakman is one of our more than 100 expert industry, academic, and government partners and advisors that work to help start-ups in cleantech, advanced manufacturing, internet of things (IoT), hardware, software, and life sciences grow faster, stronger, commercialize their products, and get to market. She also sits on the Board of Directors at Altitude Accelerator.  

Andrew Opala sits as Chairman of the Board at Altitude Accelerator and is the Founder and CEO of Preference Capital.  Andrew also hosted a session for our Investor Readiness program on Finance Fundamentals. Andrew is a seasoned entrepreneur having successfully exited from companies such as MGI Software, iseemedia and Voxavox. 

Hessie Jones is a strategist, venture partner, advocating for human-centred AI, data privacy, and ethical distribution of AI. She is currently the Innovations Manager at Altitude Accelerator. 

Taylor McAuliffe is a 4th year student at McGill University studying a major in Industrial Relations and double minor in Economics and Communications. Her work experience centres around content creation and copywriting. She currently works as the Interactive Media Writer Intern at Altitude Accelerator. 

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