Over the New Year break, I sat looking at some interesting photos that would never normally be shared on social media. Some people were ill at home, some were just in unattractive parts of cities, some were even in public bathrooms. Because that’s the reality of what these people were doing at that very moment.
BeReal is rising as a popular alternative to Instagram - encouraging people to share photos of what they're really doing at a specific moment each day.
Perhaps our human desire for dreamy positivity is finally giving way to our human intrigue about the ordinary. And this trend could be indicative of a next generation culture that runs much more broadly than just in social media…
…because the preference for Reality vs Instagram seems to have hit the market of unicorn startup dreams too.
In December, Bloomberg reported that Venture Capital funding was down 42% in the first 11 months of 2022 vs 2021 [1]. That’s a significant decrease in valuations and corresponding funding raised, especially across an increasing number of startups.
And this is not just a 2022 phenomenon. It is widely anticipated that 2023 is also set to show a continued slowdown in funding, globally [2: CNBC and 3: Pitchbook].
The oomph has waned in what was until recently an environment of very ambitious valuations and confidently-funded growth. Funding, as the fuel for growth, is now being exercised with much more caution.
But the key here is that whilst a sudden tightening of funds could hurt business models that have developed a dependency on fundraising, it does not have to hurt. It doesn’t have to be a get-funding-or-fail situation. There is still a choice that B2B software founders and exec teams can make to maintain formerly anticipated levels of growth.
Here are two ways that startups with such a dependency can choose to approach this challenge and continue to grow:
The first (and arguably less exciting) option is:
Do more with less. Accept less funding, and do more with it. And that isn’t just about eliminating any waste. It’s about operating smarter. Honing in on your core product use cases and core customers, and re-focusing all teams around only those use cases/customers and no peripherals. It’s about getting even better at your core business, and prioritising that over spending any time or money on anything non-core. The same (or fewer) employees can deliver more growth, if they have dedicated focus. This is about depth, purity and expertise. It’s about economies of scale. It’s ultimately about being the best in the world at what you do - so that the world chooses you. For more discussion on this approach, read this article.
The second option is:
Drive investor confidence upwards by actively embracing Reality instead of Instagram. In other words: properly justify a high valuation in return for higher funding.
If investor confidence has been knocked by repeated over-valuations, then valuations need to become more real. And ‘real’ doesn’t necessarily mean a lower valuation than before. After all, it’s still the same *you* in your BeReal photos, isn’t it?
Over the past couple of years, I’ve spent a lot of time with bootstrapped B2B software founders - who operate their businesses with no external funding at all - and I see significant merit in this approach. Their businesses grow proportionately to market demand. If more customers want the product, ARR increases. And with it, so does their valuation.
With bootstrapped businesses, there is limited risk of prematurely inflated teams, or of crippling burn rates, and product scope creep is rapidly invalidated if there is no product market fit.
The cashflow generated by product market fit and customer demand ultimately controls the decisions and direction of this type of business.
It might be a slower growth journey, and there is risk of competition from rivals who theoretically could outpace you if they have VC funding. But tangible proximity to customer demand is the ultimate weapon when it comes to running and growing a sustainably profitable business into the long term.
Here's the lesson:
Proximity to customer demand is a finger on the real pulse. It’s the sensory receptor a business owner can and should use to estimate the real health and potential of the business. Or in other words, to derive and keep a handle on its real valuation.
So proximity to customer demand is also the ultimate weapon when it comes to valuation... which is important, if you want to justify a high valuation to investors.
And the larger and higher-paying your customer demand is, the higher your valuation can and should be. It can be low value/high volume customer demand, but high value demand has the most immediate impact on your top line. If even the world’s largest companies are your customers, or evidently will be (it's fair to account for enterprise lead times), you’re essentially achieving ownership of your market.
So justifying the highest possible valuation ultimately requires generating customer demand in the global enterprise market (and that customer demand should include highly credible enterprise prospect leads too).
Generating enterprise demand is not easy, but there is an easy science to it: real customer demand in the enterprise market comes from achieving product market fit at that level. That means having absolute clarity on the enterprise customer problem you’re solving and how your product is the best solution. Then it means being able to articulate that clearly and concisely, taking it to market as a well-oiled and world-class machine.
And as we know, a higher valuation goes hand in hand with higher levels of funding. So... as long as the decisions and direction of your business is dictated by the finger you keep on the real pulse of customer demand, the funding you receive can reliably be used to help you outpace any rivals by just doing more of the same, but faster than them.
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Conclusion:
So whether your company chooses to accept less funding and do more with it, or whether it chooses to justify a higher valuation with a finger-on-the-real-pulse approach, there is reason to stay positive about your anticipated growth trajectory. Because it doesn’t have to be ordinary if you don’t want it to be :)
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