VC Winter, Venture Recession, Annoying Period for Ambitious Entrepreneurs, call it whatever you want…
Have you ever heard of the famous french poem by Jean de la Fontaine called “La cigale et la Fourmi” (The Cicada and the Ant)?
If you are French, you might still remember it from your elementary school days.
If not (I’m truly sorry for you), here’s an English version ‣.
Basically, to understand the VC Winter you just need to replace the Cicada with any startup, and the Ant with a Venture Capitalist.
In more classic terms, VC winter is a period when funding becomes scarcer and competition intensifies, where only the well-prepared and organized startups survive.
❄️ VC Winter : What’s that ?
VC Winter is a period when the money flowing into startups from venture capital investors slows down drastically. It’s a tough time period for startups to get through, like a steep frost in the plant world. Just as leaves fall as the days become shorter and the air becomes colder, many high-flying startups come down to earth for good when the VC Winter arrives.
To put it plainly, VC Winter is tough for everyone involved. Not only the plants (the startups), but the farmers (investors) too!
🌬️ Signs of Approaching VC Winter
While the timeline of a VC Winter is harder to pin down than a conventional season, certain indications can provide an idea - if you understand these you can take measures to strengthen your startup and cope with incoming or continued market fluctuations.
- Decreased VC Investment Activity, a visible phenomenon in the current context, VCs are much more careful and cautious about their investments (unless they are in AI of course). Taking twice as long to conduct due diligence could be a result of a more stringent process, difficulty calling capital, or both.
- Lower Valuations in Fundraising Rounds, A simple comparison of the multiples in 2023 and 2021 reflects a steep drop-off in growth expectations and risk tolerance.
- Extended Funding Timelines, One of the CEO’s biggest fears is being sidetracked by a fundraise for months while competition is catching up.
- Macroeconomic Concerns: Recessions, fluctuations in interest rates, geopolitical tensions, just read the news!
- Decreased Exits and Liquidity Events: Fewer acquisitions and initial public offerings (IPOs).
- Rising Risk Aversion: Investors favoring safety - especially when short term treasuries are yielding more than 5%.
💡 Getting Ready for VC Winter
To effectively weather this financial chill, consider the following key strategies:
- Nail Your Product-Market Fit
Just like a warm winter coat, having a strong product-market fit is essential. It means your product or service aligns perfectly with what your target customers need and want. This can improve both uptake and churn, making your startup more appealing to potential investors for future funding rounds.
- Streamline Costs
Sacrifices need to be made when the road gets tough, and often it's employees who bear the brunt of cost-cutting measures. Whether in anticipation or during the VC Winter, cost control is crucial.
Go back to the essentials: Say no to the stunning offices in the Sentier, downsize from the entire floor at WeWork Champs-Élysées - or later you might be forced to!
NSL = NotSoLiquid
- Diversify Your Funding Sources for Resilience
Think of diversification as a risk management strategy. By not putting all your eggs in one basket, you reduce the vulnerability of your startup to the financial health of a single investor or funding source.
Diversifying your funding sources is like having multiple safety nets. If a startup relies solely on one investor and that investor faces financial difficulties, the startup can find itself in a precarious situation. On the other hand, a startup that has diversified its funding, drawing support from various sources, is better equipped to weather financial challenges.
- Expand Your Network
Talk to people! You may not believe it, but the entrepreneur at the table behind you at Station F that you pass by every morning without saying hello has potential synergies with your business. Now at least go and say 'hello' to him, please!
You are ready to survive now, which is great. That said, while you are fighting to survive, your competitors fight to take an advantage of this period.
🌠 Turning Winter into Opportunity
The VC Winter is surely considered as a crisis. In English and any other occidental language a crisis is defined as “a time of intense difficulty or danger.”
So let’s find another perspective. In Chinese, the word “crisis” translates to 危机 (Wēijī), which is composed of two characters:
- 危 (wēi**),** which means Danger.
- 机 (jī), which means Opportunity.
Let’s thus use the Chinese mindset and try to find ways to take an advantage of this kind of recession.
- Refocus Efforts: Startups can use this time to refocus their efforts on improving essential business operations and refining their strategies, which can lead to more sustainable growth.
- Attract Top Talent: During VC Winter, you still need to try and find top talents to join your team, focusing only on profiles that perfectly match your vision and ambitions, even if this means hiring less.
- Explore New Funding Sources: Startups can also explore alternative sources of funding, such as crowdfunding or government grants.
🌐 Ready for the unexpected ?
While the downward trend in startup valuations began in 2022, particularly for those in the more advanced stages, pre-seed and seed companies are less affected by this decline but face reduced capital availability.
At NotSoLiquid, we take pride in positioning ourselves as the premier technology-driven investment bank for VC secondary markets in France, with an expanding presence across wider Europe.
In a time when liquidity is in short supply, NotSoLiquid is dedicated to helping historical shareholders of startups (VCs, BAs, Founders, early employees) in structuring and executing secondary market transactions. This process creates a beneficial cycle where investors can benefit from their previous investments, thereby enabling renewed investment in emerging startups.
We are resolute in our mission to facilitate secondary market transactions that foster innovation and promote the growth of the startup world, all while building a resilient and sustainable ecosystem for both investors and businesses.
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