After a recent period of significant startup growth, rumors are circulating that winter is threatening the startup industry. Startups have already raised large amounts of capital based solely on the potential for success, and many fear that this rapid growth is no longer realistic. No startup is immune to the economic challenges ahead, but early-stage startups seem to fare better than later-stage companies.
Due to new market conditions, investors and entrepreneurs are moving away from the “grow at all costs” atmosphere that previously dominated the startup industry. Early career entrepreneurs understand that the availability of money is limited. To adapt, they raise smaller rounds of funding, gradually build the business and create real value before moving on to follow-on funding. Unlike later-stage startups that may struggle to raise enough funds to account for their higher valuation, pre-seed and seed startups keep their valuations manageable.
Reaching the next milestone is what is most important during this time. Early-stage startups need to intentionally set their next goal and raise the ideal amount to reach it. Thanks to this new mode of pragmatic growth, early-stage startups can take the time to prove themselves. They can present a healthy process of business performance and progress instead of being diluted too soon by accepting high valuations.
Nevertheless, the Seed stage is not totally immune to the challenges of this cautious market period. Consumer needs are constantly changing and there is no way to guarantee that the idea an investor originally backed will succeed in a future market. However, the innovative spirit of an extraordinary entrepreneur will find a way to adapt his product to the current needs of the customer.
Investing in people rather than ideas is an important way to avoid the unpredictable market. Compared to teams, the product is overvalued. Seed and pre-seed startups are more insulated from external factors that affect pre-IPO and public companies more easily. The product offered by the startup still has room for development before entering the market strategically. While the idea investors originally fund is bound to evolve, the team’s passion, resilience and adaptability are the only constants that can determine the company’s success.
Despite world events, early-stage startups are still building solid foundations in an uncertain market by achieving small, achievable goals. These businesses grow successfully, but at slower, more intentional rates.
Nimrod Cohen is the Managing Partner of TAU Ventures