DSW Dispatches: Investors Offer Tips on Navigating the Changing Startup Economy

At Dallas Startup Week today, three leading early-stage investors offered tips on how founders should pivot in today's shifting economy. Perkins Coie's Valeska Pederson Hintz, LiveOak Venture Partners’ Mike Marcantonio, and S3 Ventures' Eric Engineer shared insights and advice.

Despite the downturn, "If you've got a capital-efficient, growing business that has strong unit economics, at the end of the day that business is fundable, and that's what we're looking for," Marcantonio said.

With an economic downturn taking hold of public markets, the effects are trickling down to early-stage startups—and both founders and investors are pivoting to navigate their way forward.

At Dallas Startup Week, a panel of investment leaders—including S3 Ventures Partner Eric Engineer; LiveOak Venture Partners’ Mike Marcantonio; and Perkins Coie Partner Valeska Pederson Hintz—talked about the how today’s economic trends are shaping the startup ecosystem. They shared insights with founders on how to best continue to grow their businesses.

“I think we’re in this odd summer where public market stocks reset earlier this year,” Marcantonio said at the event. “As early-stage investors, we’re not directly tied to those valuations, but it’s an indicator of where three to five years from now we can sell our businesses.”

“As that trickles down, those valuations are slowly going to make their way to [the startup] world,” he added. “We have to make up for what the expected changes in the future valuation will be. Nobody knows what the new norm is. It’s going to be tough to get deals done. You’re going to have investors telling companies to wait until things settle.”

Startup deals in Texas have slowed by 30% to 40%

With the number of IPOs in 2022 raising less than 6% of what they did in the first half of last year and numerous startups seeing their valuations go down, deals are getting harder to get done, the panelists said. According to Engineer, startup deals have slowed by about 30% to 40% in Texas. That’s led many investment firms to prioritize supporting their current portfolio companies over taking on new ones.

Marcantonio said the current market hasn’t necessarily changed LiveOak’s focus on the types of companies it targets. But it has changed how they prioritize things like customer acquisition costs, and it’s created more in-depth conversations with founders on how to stretch each dollar as much as possible.

Seeing some positives, too

The panelists did note some positives created by the current conditions. Due to instability in some companies and layoffs happening at others, they noted that hiring quality talent could potentially be easier for early-stage companies that can offer exciting opportunities for growth. They also noted that many firms raised record funds in the last couple of years—leaving them with plenty of dry powder on hand.

Tips to navigating a shifting market

Throughout the discussion, the panelists dropped a few tips to help founders continue to approach earlier-stage investors amid the current market.

Focus on bridge/extension rounds

Engineer: We talk about things like inside rounds and extensions, because it’s really about growing to that valuation. We still meet with companies all the time, but it just feels like the pipeline has completely dried up in terms of companies actually going out to raise. I’m guessing they’re getting the same advice that we’re giving to our portfolio companies, which is don’t go out and raise right now.

Know your business

Pederson Hintz: One of the things that you’re seeing that is super crucial for companies is [investors] are looking at the data, but you’re probably also looking at their financial statements to see where the softening is. Then you’re looking at their KPIs and saying, “What’s your churn rate? Are you keeping customers? What’s your customer conversion rate? Why are you not getting those metrics? Why are they falling? Do you know why?” If you can’t answer those questions in a board meeting, you’re toast.

Pitch decks should reflect slower growth

Engineer: Think about your sales plans and your own growth rates, and just adjust accordingly. It’s just a matter of it’s going to take longer to grow. Things that are invested in fundamentally usually have good unit economics, people are thoughtful about sales efficiency and other metrics. We look at that and indicators of could you get efficient if these things happen? There’s always that thought process, not just growing really fast at all costs.

Marcantonio: As early-stage investors, certainly growth is very important. If you’ve got a capital-efficient, growing business that has strong unit economics, at the end of the day that business is fundable, and that’s what we’re looking for. The pivot that’s happened in recent board meetings is understanding how far we can get with the current cash on-hand as a contingency plan and trying to maximize that.

Build relationships with VCs before raising

Marcantonio: I wouldn’t discourage you from going to the market to try and find funding right now, but appreciate that the conversations may be more challenging than they were six to nine months ago.

The panelists’ quotes have been edited for clarity and brevity.

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