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The new normal in startup funding


Written by Edward Upton - Founder & CEO of Littledata

In this crazy world of COVID-19 panic you may have been too busy to consider how all this impacts tech startups.

But the world has changed, and as a startup, the quicker we adapt our thinking, the more likely we are to thrive.

It’s always hard to call the end of a bull market. The decade-long run in FAANG stocks looked frothy by the end of 2019, and underneath them, the entire tech ecosystem. After the hubris of WeWork’s failed IPO, it was clear larger VCs had got carried away with the ‘go big or go home’ mantra; but the early-stage finance machine continued unabated.

Now the bull market is over for sure, and fear has overtaken greed. In the panic, many investors care more for the ability to get some of their money back today than the potential to get more money back tomorrow. As I write this, the NASDAQ index is down 30% from its February peak, and the FTSE 100 is down 34%.

This will translate into a tougher time for early stage companies looking for growth funding for three reasons:

1. Tech companies typically have limited cash reserves, or assets to borrow against, so a short-term interruption of trading could quickly tip them into insolvency. Investors are wary of being held to ransom in that eventuality.

2. Equally, investors want to hold cash back to buy bargains in good companies they know – in both the public and private markets.

3. In the UK at least, much early-stage investment is driven by tax relief (e.g. the Enterprise Investment Scheme). A big drop in asset prices means a lower capital gains tax bill, and less need for the tax relief.

So the new normal is lower valuations (to compensate for the greater risk) and a longer time to close money. There is still private capital out there, but most angel investors only have a small part of their portfolio in startups; in other words, they are overbalanced in startups as the rest of their portfolio decreases. 

They can do one of two things: sell public equities and invest even more privately, or they hold off on investing in general and wait for correction.

The investors wanting to boost their startup exposure will get access to better quality deals - but without the Fear Of Missing Out, they will take their time to consider the best deals on offer. Hence the longer time to close.

My approach to Littledata’s external funding has always been little-and-often – a good strategy when angel investors are broadly active, and our valuation is rapidly rising. I always knew the risk was a market downturn leading to this funding stream stopping temporarily. This happened in 2001 and 2009 in recent years.

The frustrating thing is that our underlying business and market need is stronger than ever: forced isolation, bare supermarket shelves and sheer boredom will be a massive boon for many ecommerce firms this year – and most likely becomes a permanent shift towards online purchasing. 

As a SaaS business with a trusted product and zero operational issues from remote working and government policy changes, we’re in a great position to ride that wave. But how do we capitalize on the opportunity without funding?

Luckily there is a simple solution, an age-old solution: profit. Almost a dirty world in the tech boom – shunned by Adam Neumann and his ilk – profit is back in fashion. Many tech companies simply don’t have the structure or culture to break out beyond breakeven. Littledata does.

What makes it possible for us is:

1. Running lean: a bootstrap culture, where every cost is questioned, and every business trip done with budget airlines and shared B&Bs.

2. Income in advance: an increasing number of larger customers paying us for a proven product annually in advance.

3. High gross margin: replacing consulting and services with platform fees, and getting reduced hosting costs as part of the NewChip accelerator.

4. Predictable monthly cashflow: revenue spread across a broad range of clients and locations

5. Revenue in USD: making our costs in Euros and GBP relatively cheaper as the flight for safety boosts the dollar.

We’re not profitable yet – but with a few further cost savings we can be there this year, and ride out the storm without needing any additional finance. Once the global situation improves, we can restart fundraising efforts at a higher valuation – and impress investors by having made progress during the hard times.

So if you're a tech company staring down the abyss, take heart! Can you make some of the changes we have made before you run out of cash? Maybe you can make do without new money this year and stay positive that there's always a next year. 

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Edward Upton is founder of Littledata and an expert on analytics setup and strategy. He blogs about all things web analytics and is a certified service partner for Google Analytics. Edward also advises companies on product development and scaling technology. Previously a product manager, and founder of Teachable, a marketplace for teachers to share digital education resources. He holds a Masters in Psychology and Philosophy from Magdalen College, Oxford.
He will be a Keynote Speaker at the White Label World Expo in Frankfurt (21 & 22 Oct), with a seminar on how to measure E-commerce customer lifetime value with Google Analytics.