Do you have cockroach vibes?

Editor Hannah Clark reveals what VCs really look for in an early stage firm
Hannah Clark

How can your start-up position itself to attract VC interest in this evolving environment?

In the wake of the pandemic-induced economic downturn, the venture capitalist landscape has undergone a transformation. Despite the challenges, venture capitalists (VCs) continue to invest, albeit with a discerning eye towards start-ups. 

Here's what they look for - including how touch you are.

Address a real problem 

This may be a hard question to ask yourself, but does your product actually solve a problem? VCs are a lot more discerning than they used to be. We saw VCs shelling out money in the 2010s like Halloween sweets.  But many of these products didn’t really solve anything. For example, do you remember Juicero? Probably not, because it was an expensive juice machine that required you to buy pre-packaged juices that the machine would simply squeeze out of the package into your glass. It was a pointless invention.

If you have identified that your product can solve a real problem, you will need concrete evidence to show potential investors. This will include market research, competitor analysis, data, etc. You need to communicate that the problem your start-up aims to solve is genuine and significant enough to attract a sizable user base.

Slow and steady wins the race

Investors want to see stability, which can be tricky with the current economic volatility. We are seeing layoffs across the board, especially within the SaaS world. At the root, many of these layoffs are the result of a rapid-scaling pandemic hangover. 

But if you’re in this situation, how do you dig yourself out of it?

  • First, don’t rely on your own data (entirely.) This may seem counterintuitive, but keep in mind that the pandemic skewed your company’s metrics not just in 2020 but throughout the following years and into the present. Many companies have been relying on this data to project staffing needs, anticipated revenue and build out growth targets—and this is where things go awry. 
  • Focus on building rock-solid, documented processes before you hire more people. Rapid scaling has also led to a relentless operational balancing act. Both rapid scaling, and now descaling, has caused staffing changes which not only disrupt team dynamics, but also lead to challenges with staggered learning, interruptions in development, and the necessity to establish new workflows.
  • Look internally to your employees to help solve these miscalculations and operational challenges. For example, your sales team can speak to customer retention hiccups and your product team can discuss supply chain concerns. As well, all employees can speak to where they feel holes in training and what they need to do their job better. 
  • Take your marching orders from the front lines. If you lead a more mature business, don’t necessarily look to your leaders for this information. Connect with those at the ground level and make sure they’re granted the psychological safety to speak candidly about their realities and proposed solutions. 

Grow sustainably 

In terms of your growth, don’t just measure it by monthly active users (MAU) or weekly active users (WAU) in isolation. Instead, you should pair it with another metric that can show the level of long-term customer satisfaction with your product—retention. 

The better the retention, the more people decide to use your product in the long run. With poor retention, you’ll end up reaching a point when you are losing as many users as you acquire. 

To establish positive retention you need to invest time and resources into user onboarding. A positive onboarding experience fosters greater product adoption rates, leading to improved retention. Consequently, even during challenging periods when growth slows, there's assurance that the user base remains intact, with a significant portion likely to stay loyal over the long haul.

Cockroach vibes

One of the main trends I’m seeing with early-stage startups receiving funding are those in markets with strong likelihoods of growing even in the event of another global catastrophe. Many of the recent investment deals announced were in blockchain, healthcare, and cloud services. 

In the years before the pandemic, investors were a lot more flexible and optimistic about the market potential of new and novel ideas. Now, VCs are tightening their belts and looking for much more robust financial projections.

Could your business survive another pandemic? If your start-up lacks resilience to withstand potential setbacks like another wave of lockdowns or a further incline of the cost of living crisis, you may need to take a pause to rethink your business and its model. 

Ultimately, adapting to the new venture capitalist landscape requires start-ups to demonstrate usability, sustainability, and resilience. By addressing real problems, and fostering sustainable growth internally and externally, start-ups can increase their appeal to VCs in today's cautious investment climate.

Written by
Hannah Clark
Written by
April 8, 2024