By Yiannis Giokas
Having been on both sides of the table, I have noticed that funding for early-stage companies is becoming more difficult to get, particularly within the major technology hubs. This will hurt innovation in the long run. It's happening for a number of reasons, including that venture capitalists (VCs) are running out of liquidity due to the time required by startups to exit or go public. As a result, VCs are becoming more selective regarding where they invest and at what stage in order to ensure a timely delivery of the expected returns on their limited partners (LPs). I've come to this realization based on working with early-stage startups that are currently in the process of fundraising, from my engagement with VCs who are trying to raise their next fund, as well as from my personal angel investments.
The media often laments that the era of startups is over, given the fall in valuations and stock prices, the collapse of a few unicorns and the turbulence in private markets. Today, 217 unicorns are worth billions in private valuations. Most of them did not exist five years ago. Billion-dollar private valuation companies often deflate when going public. Does this impact the entire startup ecosystem? Or it is merely an investor’s step towards market maturity? I believe that it is the latter and that it was about time for this to happen.
In the last few years, it wasn't unusual for startups with just an idea sketched out on a paper napkin to raise large rounds. The ideas did not necessarily have real value for their audience (like Yo!) or any real business model (like Quora). Moreover, we witnessed a boom in the services provided to the startup industry, like coaches, mentors, accelerators, incubators etc. -- who, in an effort to justify their existence, often lowered their standards when reviewing ideas and business plans. All this buzz turned investing to startups (from angels to LPs) into a social thing rather than actual business activity. In my experience, it's common to hear people at parties and galas brag about a new startup investment or a new startup board position instead of addressing actual business issues relevant to these companies.
This lifestyle investment party might be over given the turbulence in the global markets. But it could never halt innovation or disruption. I think that large enterprises and institutional investors will continue to look for ideas that can enhance, transform or disrupt markets, products or services. To this end, corporate environments will continue to place constraints on their intrepreneurs and universities all around the world will continue to generate new ideas via their students.
These two sources of innovation will maintain a steady flow of entrepreneurs with solid ideas. Institutional investors and corporations will continue to support these kinds of startups, so as to connect research with the market while protecting their brand from being associated with any potential failure. It is always safer for a major company to let its interpreuners spin-off and continue to fund them rather than taking the brand damages if they fail.
A challenge that will arise from this practice is the steady shift of large corporates into “large scale” startups, with the likes of Goldman Sachs leading the path. Their motive, in order to initiate this new cycle of disruption, is to continue to attract talent and to disrupt themselves before getting disrupted by someone else.
The key difference between this cycle of disruption and the previous one is that many ex-startups like Google, Amazon or Facebook are going after the disruptors either by copying them (Snap) or by eliminating them using price wars (Blue Apron). This cannibalization is possible due to the lack of regulation of any type for these new mega-companies. These companies do not want these entrepreneurs-to-be as peers but as employees.
There's a lot of space for innovation and new entrepreneurial ventures, given that a number of new domains (like virtual and augmented reality, autonomous vehicles, artificial intelligence and machine learning to name a few) have risen. All these greenfields are open to first movers to conquer them. On the other hand, globalization has increased everyone’s reach, thus bringing together local niche markets to unified global ones.
Market cycles are shortening, so the window of opportunity for any new idea is becoming tight if there is no real substance to support it (such as intellectual property or technology). Entrepreneurs should think thoroughly about whether their company should be situated within major tech hubs or closer to their actual markets and whether they want to launch a startup or a small-medium enterprise (SME). Apart from that, they should decide whether to do it alone or in conjunction with strong financial partners (big corporations or existing players).
The rebalancing we witness today in valuations and fund flows, given the global financial uncertainty, refers more to an action toward equilibrium between customer value creation and corporate valuation. That should not discourage entrepreneurs from chasing their dreams but it should act as an alarm in order to better prepare for presenting more solid business plans with measurable metrics towards both value and revenue creation. If this is highlighted, funds will flow and the valuation will reflect the risk and value entailed.
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Yiannis Giokas is an entrepreneur and expert in cybersecurity, analytics and telecoms. He is engaged in initiatives for IoT and blockchain.