Following the end of the zero interest rate salad days and resulting “flight to quality,” venture capital (VC) firms are operating with a different playbook this year, one focused on balancing profitability and sustainable growth, investors speaking at Collision 2024 said.
BetaKit caught up with partners at a variety of VC firms speaking at the tech event to give founders an idea of what investors are thinking about in the current fundraising environment.
Work with what you have
After a tough 2023 that saw numerous layoffs, VCs are focused on startups that can work with the resources they have.
During a panel titled “The battle for growth at all costs,” Spencer McLeod, partner at Chicago-based G Squared, said “Investors are telling companies [to] be thoughtful about every dollar you spend.”
However, he added that AI startups continue to have strong access to capital. On top of that, companies that have made workforce reductions are thinking about how to get more value out of each employee they have, with McLeod citing Klarna as an example.
Speaking on the same panel, Inovia Capital partner Magaly Charbonneau said things are picking up in Canadian venture after a slow Q1 and Q2 to start the year. Still, “what is important for us is that our CEOs really adjust their burn ratios and adjust the size of the team. So there was a lot of [reduction in forces] last year and the beginning of the year so we could increase the runway and try to accelerate growth.”
The path to profitability
Charbonneau said sales, especially for software-as-a-service (SaaS) companies, are taking much longer to close—a sentiment echoed by Christophe Bourque, general partner at White Star Capital, who attributed some of the delay to companies pausing new SaaS licenses while they figure out their AI strategy. As a result, founders have needed to focus strictly on their unit economics over the last 18 months.
“Last year … the multiples were super high so now [companies] have to grow into those valuations. [They’re wondering] what do they do, [that] they’re not meeting their growth targets — but you have to build options. You have to make sure you’re right-sizing your team and that you have strong unit economics and you have a path to profitability because you may not be able to raise another round,” Charbonneau said.
Stephanie Choo, partner at Portage Ventures, said the zero interest rate policy (ZIRP) environment and the mindset of pursuing growth at all costs no longer flies in 2024.
“In contrast to the 2021 era, VCs are looking for growth—but efficient growth,” she told BetaKit. “VCs are not building their exit cases entirely on multiple expansion.
“That 40 to 50x revenue, post money, is kind of where I see companies anchored, but the bar and what you have to show, especially in terms of revenue, to hit that, that is what’s gone up.”
A series of different decisions for startups
Looking at the market by company stage, McLeod said his firm primarily focuses on Series C companies and beyond, and right now that particular market is frozen. “People aren’t focused on [total addressable market], they’re focused on gross profit,” he said.
“We’re more looking at companies with tens of millions of revenue and [asking] can we take this to hundreds of millions of revenue?”
Bourque said the market remains competitive for early-stage companies. “I wouldn’t say that overall the market, at least not in Series A and Series B, has come down that much. If you’ve got a business that’s growing 3x year over year, you’re managing cash properly, you’re one to ten million in annual recurring revenue going on to (20 to 40) million—you’re going to get a lot of term sheets and we’re seeing those valuations actually come close to what they were maybe two years ago.”
Series A valuations remain around the same where they have always been, Neha Khera, managing partner at 7am Ventures agreed at a panel titled “New trends in early-stage investing.” But the bar to reach that valuation, particularly regarding revenue, has gone up.
“Getting from a pre-seed round to a seed round is very hard right now because you already invested some capital, you’re expecting a premium on your valuation, but it’s still quite early,” said Sara Deshpande, general partner at Maven Ventures, on early-stage trends panel. “Once you’ve got a little bit of traction, there’s a lot of Series A capital [but] the bar is very high.”
She added that investors are looking for founding teams who are certain the vision of their company is worth fighting for will attract investors, but it’s still prudent to ensure “your funnel is really wide.”
Going stateside
Ryan Henry, partner at Sand Hill North Ventures, said the early-stage market in the United States has more VCs and angel investors, making it easier for companies to get capital quickly.
“As a Canadian founder, it is highly unlikely that you’re only going to build in Canada unless you work within healthcare or unless you want to be the next Wealthsimple.” Henry told BetaKit. “There are absolutely companies you can build only in Canada, but more likely than not you’re going to sell to US companies or US consumers, so you should talk to their investors.”
With files from Douglas Soltys. Feature image by Vaughn Ridley/Collision via Sportsfile.
Correction: An earlier version of the article misspelled Sara Deshpande’s name. BetaKit regrets the error.