Make no mistake, 2021 is a raging bull market if you are a startup entrepreneur. Capital is abundant, valuations are high, terms are favorable and due diligence for many investors has fallen out of fashion.
The rebound from the pandemic has been rapid with a record volume of venture capital investment deployed in Europe in 2020 – €42.8 billion across 9,341 deals – and a new record likely to be set by the end of 2021.
This is great news for entrepreneurs raising funding. There is more money and there are more funds than ever before. But does this exuberance come with a hidden cost?
For entrepreneurs raising venture capital funding, there are a number of possible traps.
The allure of raising ever-larger funding rounds can act as a significant distraction for entrepreneurs who may be better placed devoting all their attention to growing their business. The previous cycle of raise funding, focus on building the company, raise funding has been replaced with blurred lines where most companies are continuously having conversations with investors whilst simultaneously managing the day-to-day.
If the consequence is missing key revenue or other important metrics, the company may pay the price later on when they are unable to raise the next round of funding (especially when the market inevitably cools) or with a sub-optimal company culture that is not oriented towards consistently hitting key business goals.
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Building a company worth more than a billion dollars used to take a long time. Hit unicorn status in a decade and you were doing well. Today, the whole startup ecosystem is like watching a movie on fast forward with some unicorns being created, at least on paper, in a few years.
This puts an incredible amount of pressure on entrepreneurs who need to balance the dual requirements of numerous funding rounds and rapid business growth on compressed timelines. The rewards are vast for those that can successfully pull it off, but it comes with an elevated risk of burnout.
The need for speed in this market means that hiring is taking place faster than ever and new joiners have little time to get to know each other before the next cohort of new hires arrives. With founders and senior management working hard to keep up with the general pace of the market, time spent on articulating the company’s vision and values internally, assimilating new employees through training and social events, and building close personal relationships with team members can all be compromised.
This results in teams that are not working together as effectively as they should or, worse, attrition with employees leaving to find other opportunities (of which there are many in a buoyant hiring market).
Raising capital is the start of the journey. Next, you have to build a world-class team to support you. With so many well-funded startups, not to mention bigger tech companies experiencing sustained growth, the competition for talent is intense.
Entrepreneurs who close their funding round and then look to hire dozens of new employees will find it a considerable challenge. Not only can it become another distraction for the founders and senior team, but taking longer to fill vacancies than planned will lead to slower progress and additional strain on the current team.
Lack of rigor
Most entrepreneurs would agree that raising money faster and more easily than before is a positive. Yet at the earlier stages of pre-seed and seed investing, the lack of thoughtful questioning from investors is depriving founders of the opportunity to have their business plan tested.
The value of this, of course, depends on the experience, background, and approach of each investor, but as a matter of principle, having dozens of investors grilling you about your business is a great way of getting rapid feedback. In some cases, it may even save entrepreneurs time and money, as they iterate before they commit capital to test their hypotheses in the real world post-funding.
A crucial moment for every entrepreneur is establishing product-market fit. The confidence that comes from knowing some customers want to buy your product or service usually kicks off a large funding round but also validates that it makes sense to spend many more years of your life building your company.
In the past, product-market fit was mostly achieved with little capital. Founders battled and scrapped their way to it. And in doing so were able to build a credible go-to-market strategy based on their learnings which they could then scale with more capital.
Today, with lots of capital at the earliest stages, founders are able to spend a lot on customer acquisition and take a more scattergun approach. It often results in selling to initial customers in different verticals with unique use cases. This can look and feel like product-market fit but is not a solid foundation for building a go-to-market plan.
Despite these traps, it is hard to remember a better time for startup entrepreneurs to be raising capital. And with careful planning and discipline, these traps are avoidable.
Ignore the noise, look after your physical and mental wellbeing, have a Plan B for a world with less abundant capital, and surround yourself with smart people that you trust who will be there for the ups and downs of the journey.