Lots has been written about the drop in valuations and tumble in VC funding in 2023 versus the peaks of 2021. Headlines mention valuations that have halved since the peaks, and unicorns that have lost their crowns. However, the reality is more nuanced, as all businesses have not been affected the same by the market downfall. What is happening is rather a flight to quality. Most investors (public and private alike) are going back to fundamentals, and paying much more attention to a handful of criteria. 

Let’s take a look at public markets first. When you look at averages, the story goes “Nasdaq is down 22%, and the BVP Cloud Index is trading 50% lower than at its peak in 2021”. However, once you go deeper into the details, the narrative starts to become clearer. Tech stocks have not been hit the same way by the recent market correction. While some sectors have completely rerated (Marketplaces like Booking or Etsy went from trading at 10-15x to 5x almost overnight, Mobility players like Bird went from 15 to 0.5x in the last 24 months), other sectors have stayed remarkably resilient, such as SaaS, but also Consumer subscriptions (Netflix went from 8x to 6x) and Gaming (Electronic Arts went from 7x to 5x).

Now, let’s turn our attention to private markets. Again, headline data from Crunchbase as of Q1-23 talks about “VC deployment being down 53% year on year”. That being said, there were a number of high profile deals completed in recent quarters that tell a very different story. In Europe, companies such as Saastrify, Prewave, Swan, Raft, Parloa, have all raised very successful Series A or B despite the challenging market. 

So, what are the concrete takeaways for entrepreneurs today, thinking about raising a funding round in the next 12 to 18 months? Here is a list of 8 levers that you can pull and that will significantly increase your chances of raising a round at the best conditions

1/8 Recurring Revenue

There is a clear premium for true recurring revenue. Not re-occurring, not transactional, not consumption-based, but truly predictable recurring revenue. 

How do I act on it? Contemplate making your revenue more recurring, even if that means lower revenue in the short term. Consider asking for multi-year commitments if you can. Visibility and predictability are king in this market.

2/8 Attractive Margin Profile

During the peak years, investors paid less attention to gross margin, funding many businesses on the promise that these margins would improve over time. Today, the pendulum has shifted the other way, and investors will scrutinise margins, ascribing a premium to high gross margin businesses and, in general, lean organisations. When money was free, many tech companies overhired and feel a bit bloated today, forgetting to look for ways to automate their own internal processes. 

How do I act on it? Review all COGS and Opex items line by line and think how much more automated they could be. It’s also worth reviewing pricing, as you might be selling too cheaply if there is a lot of work at onboarding or in customer care. Can you outsource some of these functions to partners? 

3/8 Net Revenue Retention

Net revenue retention, meaning if a cohort of customers brings $100 revenue in year 1, how much do they represent in year 2, is becoming one of the key metrics monitored by investors. Schematically, nobody wants to invest in a leaky bucket (work hard and pay high acquisition cost for new customers, and then lose 30% of them after a year). In terms of benchmark, anything above 100% is good. Above 120% is best in class. 

How do I act on it? By investing in a customer success team much earlier than you think. Many series A startups invest in Go-to-market, but not in success. It is equally important to keep these hard-earned customers and make sure they are buying more from you over time.

4/8 Must-Have Product

Everyone believes they are a must-have product. However, in difficult times where budgets are tight, it becomes clear that some products are more must-have than others. A few good indicators for this are engagement metrics and ACVs. For example, if users open your product every day and spend 4 hours a day in it (think of an ERP or a CRM, for example), it is much harder to churn than a tool used a few times per year. Similarly, ACVs can be a good proxy for this. If the ACV is large compared to the overall budget of the buyer, it means it probably has strategic value and senior-level attention (think of a core banking software, for example). Finally, you can also try to estimate the cost and friction for your customers to switch (think of database businesses, for example, which have extremely low churn).

How do I act on it? This one is difficult to shift overnight, but I would think extra hard about what are the product features or positioning that can make you more sticky and generate more usage, as it really changes the narrative for your company. 

5/8 Diverse Customer Base

Who is the customer base? In this volatile world, the more diverse, the better. Companies that were overexposed to VC-backed tech companies have suffered. Companies that are too exposed to consumer retail may feel the macroeconomic shocks more than others. Companies that are overexposed to one geography are also more at risk. 

How do I act on it? This needs to be intentional. Often, companies will start by being quite concentrated (one vertical, one country) which is good as they can demonstrate faster product-market fit. However, as you scale, I would try to be very intentional in diversifying your customer base.

6/8 Efficient Growth / Path to Profitability

Profitability is the new grail. Demonstrating a path for profitability is now a requirement, as the funding risk is much greater than it used to be. (Funding risk refers to the risk of the company not getting its next round of funding). At later stages (series B+), you want to show that this could be the last round of funding. I speak to many entrepreneurs who have got used to raising every 18 months, and the bigger the company, the more it burns. It’s a dangerous trend, and ideally, you want to show that the more you grow, the less you burn. 

How do I act on it? Start monitoring cash efficiency. Burn multiple is an easy metric (how many $ of revenue were gained in the quarter vs $ burned). It will show investors and employees that you are trying to build a sustainable profitable business over time.

7/8 Gen-AI Disruption Potential

Gen Ai is probably the most talked-about topic of 2023. It is clear that it will profoundly disrupt businesses and change the way we live. Investors will assign a (large) premium to businesses that are deemed to benefit from this secular change or at least have a robust strategy towards it.

How do I act on it? Whichever sector you are in, you NEED a Gen AI strategy. How are you leveraging Gen AI tooling in engineering? In customer care? How is your market going to be affected by Gen AI? If you don’t have a strategy, someone else in your market will.

8/8 Climate Impact

Finally, climate change is probably the other secular trend that investors are actively investing behind. There will be winners and losers in this transition to a net-zero world, and a large premium will be assigned to businesses that are proactive on the topic (some public and private investors might not even be able to invest if you DON’T have a positive ESG impact).

How do I act on it? Again, whichever sector you are in, you HAVE TO think proactively about the impacts of climate change and the net-zero economy. Can you benefit from the change? Don’t underestimate how quickly the disruption is coming. This is quite binary, and businesses that are on the wrong side of the trend will struggle to raise, for sure.