[Music] Welcome to billion dollar startup where We bring you Visionaries and disruptors Who have started scaled sold or invested In a billion dollar startup also known As a unicorn we also feature Tech Founders who are building the next Billion dollar startup billion dollar Startup is a unique podcast sponsored by Dragonx Capital The Venture Capital firm That concentrates on seed and early Stage tech companies with the X Factor [Music] Welcome to another episode of the Billion dollar startup today we are Going to talk about a little bit about The fundraising climate currently right It's a very very difficult time for Founders and still a lot of them have Unrealistic expectations or valuation we Want to kind of discuss a little bit About how we see as a VC and what's Going on the with the current kind of Fundraising atmosphere and environment Ivan happy to have you again to share Your wisdom with us talk to us a little Bit about what you see right now the Climate today is uh difficult in several Ways number one there is a significant Flight to Quality so investors are Looking for the entrepreneurs that are a Lot more conservative For example two years ago burn was not a Big issue but right now burn is top of
Mind there is a new terminology for Enterprise SAS companies that is Measuring the burn to mrr the monthly Recurring Revenue that ratio is very Much there two years ago nobody asked About when is the path to profitability Top Line growth was all the rage but Right now we want to see path to Profitability we want to see companies Getting to break even So the aggressive growth has changed to More we were a little bit more Conservative a little bit more Conservative it's not that growth is not Uh rewarded it absolutely is but at the Same time it is not going to come at the Cost of burn whatever it takes spend Whatever it takes Um so the there's an absolute move Towards companies that are very Capital Efficient or conservative with their Burns and are measured in the way they Are investing the money to grow so That's number one number two is that the Climate has changed because investors Are pulling back a little bit across Different stages except for seed stage So very early stage financing has Remained strong and the valuations have Not dropped off but all the other stages We've seen a drop-off evaluation and the Sizes of the rounds so that means that If you're for example in your a round And you're going to be going for your
Growth round the expectations are higher That you're hitting the magic numbers of 10 million error you've got to have a High growth rate you got to have a low Burn rate you got to have absolutely no Churn quality clients otherwise it's Going to be very difficult and most Importantly evaluations have normalized And they've essentially regressed to the Norm and all those people that are Expectations of 30 50 or even 100 times Revenues those days are gone the current Market only rewards the best companies At 8 10 maybe 12 to 15 times ARR for the Best Enterprise SAS companies at growth Yes and a lot of VCS they're seeing a Lot of capital A lot of dry powder right They are kind of watching and observing And kind of see what's going on or they Just you bring up a good point because There's two measures that are really Important keep in mind number one the Capital raising activity which has Continued and for Venture Capital the Decline has been much less than anyone Else so there's still a lot of capital That has been raised yes but most Importantly dry powder has actually Increased dramatically so there is The capital that has been committed to Funds yes but not yet deployed and that Number is now quite massive that me and That number has to be deployed the Commitments are there and these funds
Have a short deployment period of Usually some sort of companies so they Need to back companies so there are but They are not going to go back to real Peace having bad company has to have Evaluation so the valuation question Remains very important and I think that Regression to the norm is very healthy It's almost like the VCC it then the Founders kind of catching up and they're Having a reality check a little bit yes Uh so one of the things that is causing Is you're seeing a lot of extension Rounds so an extension round is when uh A round has been raised before at a Particular valuation let's say you Somebody raised 10 million dollars on 35 Million valuation and now they're not Quite ready for the next round they ask The Insiders and maybe another fund to Come in and they extend that previous Term sheet for additional Capital it's Just me a little bit more capital a Little bit more but the problem that is Really good for the person coming in yes But it's very difficult for the founders And people that remain because that's Extra dilution uh sometimes this could Be a year after the last round but Sometimes it's necessary because they Need to get to the point where they can Raise the next round for Founders what Are some of the things they need to Pivot or they need to adapt in the
Current climate if They cannot demonstrate proven product Market fit and a very repeatable really Repeatable sales model They will have a very difficult time With the next round so they need to use A seed round to get to the a round and At that point those two factors Obviously assuming there's a strong team In place those two factors really need To be demonstrated and some of the Companies that we look at is where the Only knowledge is the high growth but we See a path to profitability we see a Path of hey they actually it's almost Like if they keep growing this rate They don't need to raise money but They're going to raise money kind of Thing right yeah but it puts them in a Good position because if you're in a Position when you're growing and you Don't need to raise money That's where everybody wants to invest Yes so we're seeing actually a lot of Good companies like that and it's Actually a very healthy place to be for Them and just before this episode you Don't need to reveal names of the Company but there's one particular Founder you were Having a conflict with right Yeah because the CEO and his team have An extremely high burn and uh You know 750 000 per month almost a
Million yeah uh but the revenues are not Even there and they want to continue to Keep that burn that high which I think Is a mistake in the current environment Because even if they get to a point Where they want to raise a big growth Round their current market is going to Really uh take a negative view of that High of it burn and some of the founders That we you know portfolio companies When we interview them uh they talk About leaning down they talk about being A being more Capital efficient they talk About hey we're going to grow but we're Not just going to hire a whole bunch of People hire a whole bunch of Engineers We like that approach and I think what We're going to see is a return to the Old days where it's not all about Top-line growth it's not all go grow as Fast as you can we can't burn it's a Little bit about being Capital efficient We want to make sure that you you're Measured in the ways that you're growing And you're hiring and we just don't want To throw money away we want to make sure That it's being spent properly and we Want to see results for every dollar Which may not be so bad for for Tech Because if it forces Founders to be Better it forces Founders to create Better products right we forces Founders To to have To be better leader to lead a team right
Correct and it also there's two things Not things there's two categories that Are being removed from the market from An investor standpoint or the past few Years we had what we call tourist Investors these are investors that Shouldn't have been there in the first Place uh but they came into the market They raised money and they started Investing so they were not valuation Sensitive kind of like throwing dots Right They made it difficult for everybody Because it's like a guy with a very bad Car going in the F1 race and it makes Everybody crash and then the other thing Is a lot of people that should not have Been founders of companies managed to Raise money and those companies are not Going to survive no they're not going to Make it I spoke to one actually uh just The other day 220 million dollars in and the company Just shut down 220 24 investors Yeah and included all the big names that You would expect and they all think There is more 220 all gone shut down Wow we don't want to make that mistake And some of the things that we talk About hopefully to prevent you from Making those mistakes doesn't matter if Your founder listening to this this show Or you are in potential investor you are
An investor listening to this show Hopefully that that gives you a little Glimpse of what's happening so anyone Pitches you an idea if you're not Capital capital efficient if they are a Bit of just focus on too much on growth And not focus on profit I mean just just Be aware so a couple of uh pointers for The founders to remember number one Do not wait till you meet money until You need money before you start raising Money you got to have at a minimum six To nine months of Runway have a big Conversation have the conversations for The next round uh also if you haven't Already done so make sure your burn is As low as possible you want to Demonstrate Capital efficiency Proactively you don't want your Investors to come to USA you need to be Capital efficient you need to be very Very lean and mean these days and also If you have the choice if your investors Come and say the only way we're going to Give you capital is an extension to your Last round you need to take that because It's better to survive this current Environment and live to fight another Day and then be able to raise that Higher valuation in a couple of years Than to just be stubborn over the Valuation issue you your job as the Founders is to keep the company going You have a fiduciary your clients to
Your employees and to your investors yes Therefore you need to do what it takes To get there proactively And until next time We appreciate you joining us for this Episode of billion dollar startup be Sure to rate review And subscribe to the Show and visit dragonx.com for more Resources based on today's topic as well As for access to previous episodes That's dragonx.com thank you for Listening
