Entrepreneurs need to pay attention to what investors think

The writer is an investor in tech start-ups at Samos Investments

I’ve never had as many conversations about what investors think as I do now.

And these discussions go all the way to the top of the investment cycle with limited partners (LPs) – pension funds, insurance companies, endowments, foundations and high net worth individuals who, attracted by traditionally high returns of the asset class, put large sums of money to work by funding venture capitalists.

This may seem too far down the food chain for start-up founders, but it’s something they need to pay attention to. How LPs react affects investors’ strategies. This, in turn, affects the ability of start-ups to raise funds and ensure that the company has sufficient support in difficult times.

Just look at the agenda for SuperReturn International, a major venture capital and private equity event, to see what topics LPs and investors care about. Environmental, social and governance issues, geopolitics, macroeconomics, general partner allocations and more are all topics of discussion.

Indeed, venture capital funds are facing difficult economic conditions. Typically, a fund will deploy its capital within five years. Recently, however, there has been a spike in valuations. Businesses are more expensive and funds pay more to invest in them, forcing them to spend money and raise funds from LPs sooner than usual. New funds have returned to LPs to raise capital in as little as two years.

“As an emerging fund, market uncertainty hurts us the most during a capital raise – although statistics show that emerging managers, especially women, outperform,” says Gayatri Sarkar, founder of Advaita Capital. “We’ve seen over the past few years that if you’re not disciplined and patient. . . having a large sum of money to throw at founders does not help the ecosystem, but rather brings it down.

And VCs must navigate this difficult cycle while managing their portfolios. With rising costs, supply chain challenges and general uncertainty, many companies are in talks about business continuity. Conversations with investors tend to be about extending a bridge until things calm down – a difficult question in the midst of a pandemic and with the war in Ukraine.

For founders, timing is everything and knowing which investors will be your lifeline when the going gets tough is key. You need to make sure there’s enough money—and support—around the table when things aren’t going so well. (Interestingly, investors need the same thing: without supportive LPs who are willing to talk about their challenges and strategies, it’s hard for them to plan future fundraising.)

When discussing with investors, founders should have an idea of ​​a VC’s commitments and reserves to ensure they won’t run out of cash. Questions to ask include: How do they feel about the current economic and political climate — will they deploy capital anytime soon? Who are their LPs? How do they view follow-on investments in their portfolio companies?

At a time when every investor will think about how to future-proof their portfolio, founders also need to demonstrate how the company will make money grow. The best companies will be funded even in times of economic uncertainty. But investors are also increasing their due diligence so companies that might have received money in better times can be rejected. The more you can demonstrate efficient use of money, the more you will be able to fundraise and survive.

“I don’t have the luxury of hindsight or historical data on companies when we invest,” says Yana Abramova, managing partner of Pretiosum Ventures, a venture capital fund. “What I do have, however, is the opportunity every time I invest to change a product category, an industry or an entire technology.”

I am cautiously optimistic. Just like when the pandemic started, there will be more verification calls with my portfolio founders. I want to understand their cash positions and their plans for best and worst case scenarios. For example, how important is their product or service to customers, and if inflation suddenly increases, how likely are they to continue paying for it? I also want to know what the company’s financing options would be if potential investors were to panic and adopt a more cautious strategy.

If you’re a Founder currently raising your first round, you’re probably concerned about how quickly you’ll be able to finish. I would advise doing business as usual – there is a lot of capital in the market – but ask the right questions and make sure you raise enough to get you through the next 18 months.

Comments are closed.