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With nearly 25 years of experience in both building sales organizations and generating business growth at scale, I understand the factors that influence a company’s valuation. Nine times out of ten, these metrics are driven by genuine confidence in a product and its market potential. However, as a founder, it is critical to fully understand and capitalize on the current investor landscape to successfully secure funding in this turbulent market.
In the third quarter of this year, venture capital investment in the US fell to $43 billion — the lowest since the second quarter of 2020 due to high inflation, rising interest rates and fears of a possible recession. Now the state of the market reveals two competing prospects.
Amid market corrections, an overall slowdown in the IPO and pressure on returns, investors are more frugal than even a year ago and are adjusting their vision-based valuations accordingly.
At the same time, entrepreneurs are hesitant to accept financing at a level lower than what they have seen in the market in recent years. Growing companies at all stages face the fundraising challenge at a time when getting their desired valuations is difficult, and investors are extra aware of the time it takes to see returns on their spending.
Related: How To Know Which Investors To Let Into Your Inner Circle
Valuation has always been a major stumbling block when negotiating with investors. Here’s what to watch out for:
Table of Contents
Identify changing venture capital criteria
The funding environment is changing, and pretending it isn’t gets founders nowhere. Instead of relying on old tactics, founders and CEOs can stand out to investors by realistically valuing their company and allocating resources appropriately. Looking back at past deals to compete for a higher valuation is an uphill battle that those looking for financing in this market will not win. By accepting it now and understanding the paradigm shift taking place in the investor-company relationship today, business leaders will be more successful in aligning with investors on their valuation.
Entrepreneurs will also have to rely on investors’ new criteria to prove their company’s worth, both in the early start-up phase and in the midst of seeking a later round of funding. To ensure that investors feel confident in their decision and see returns, business leaders need to go back to basics, regardless of the size of the company.
For example, startup founders should do their research to ensure they have a solid product that meets a real market need while remaining objective. They will have to answer persistent investor questions, such as:
- Have you found a problem worth solving and will your product do it seamlessly?
- How does your product really differ from that of your competitors?
- How are you going to prove this to your potential customers?
- Have you interviewed potential customers and conducted experiments?
- Have you refined your prices?
Related: The Price Is Right: How To Praise Your Product For Long-Term Success
Likewise, more mature companies will need to stay nimble by capitalizing on what investors are looking for in later stages and asking themselves questions like:
- Do I understand the investor’s portfolio?
- Their investment strategy?
- Have they successfully invested in a company within the same industry?
- Do I have hard success metrics I can refer to?
It’s time for companies to let go of the “I have a unicorn” mentality, which means they need to actively challenge their own assumptions about a product’s market potential. Unicorns are rare, and it’s time to recognize that overvaluing a company will deter investor confidence.
In this market, investors have the power and can choose reference treatment from companies in return for investment. This can include liquidation preferences, preferred stock, allocation of board seats, and more. Combined with approaching investors with realistic expectations, leaders should be prepared and open-minded for these negotiations, as this can help secure a higher valuation.
Related: Mind the Gap: Bargain Hunting in a Money Rich World
Make use of leadership
In obtaining funding, the credibility of the team is immense to gain the attention and trust of investors, especially in a turbulent market. Companies need to build a team of trusted leaders with specific roles in their business – those with a proven track record of creating efficiencies and executing go-to-market (GTM) plans.
A company or product backed by leaders who have built successful businesses and understand how to fine-tune a GTM plan is a big step toward generating enthusiasm and interest. Successful executives know how to get an idea off the ground and have the network to make it come to fruition – and investors are taking note. In addition, having a well-connected team also helps to arouse the general interest of the entrepreneurial community and potential clients.
It’s easy for founders and CEOs to narrow their focus to current funding efforts. However, it is also of utmost importance to look ahead by nurturing existing connections. Leaders should surround themselves with hard-working visionaries with similar business interests and values to open the door for a later stage partnership or collaboration in a future venture.
Related: 15 Mistakes Successful Leaders Avoid
Approach with hard data
In today’s market conditions, raising finance requires more than just an intriguing product and a great idea. Today, companies must be prepared to show hard data and how that will translate into their GTM strategy. Saying no to theoretical numbers and demonstrating proof of concept and scalability through data is critical.
With strong data to support their vision, founders and all business leaders can easily answer questions such as: How is your business really performing? How do you continue to generate income six months later?
Identifying the ROI that a company can offer an investor is vital in securing a desired valuation and investment.
Adjust in real time
A solid GTM plan is crucial to securing a desired valuation and maintaining investor interest. To do this, companies must establish a “single source of truth”. When metrics are pulled from multiple sources with different processes and standards, investors will see gaps in the plan, which will show a lack of consistency and be considered non-credible to investors – an observation that is very hard to come back from.
Traditionally, GTM and operational plans have been separated based on misaligned priorities, insufficient data and subjective perspectives. Not only does this cost companies time and energy, but misaligned business functions and disorganized budget allocation are bad news for investors. Companies that can present metrics from a single source will see more operational transparency, a more unified planning experience, and more calculated growth. A consistent reporting format like this allows teams and investors to know where they stand on sales targets and how to adjust strategies to optimize success.
To achieve a more unified planning process, business leaders can leverage data-enabled AI platforms, which use ML insights to identify patterns and discrepancies that can maximize success. In this context, AI can provide insights that enable organizations of all sizes to look to the future to see which decisions will have the greatest impact on the bottom line, mitigating risk. In addition, these models enable companies to collect data and continuously re-evaluate resource allocation.
It all comes down to trust
Understanding what investors want to know and providing transparent access to those metrics in today’s market will make or break these partnerships. Researching current investor criteria is crucial to being prepared for what investors are looking for in a funding pitch, while using leadership will build confidence in their projections. Investors will need to be confident where entrepreneurs get their data and their ability to adjust GTM plans in real time to meet ever-changing priorities.
