Despite economic headwinds, VCs say this year is still a fantastic time to raise capital — if a company has its fundamentals in place. While the core metrics that matter depend on factors like company stage, business model, and more, many VC firms agree that growth at all costs is fading, and expectations are that companies will transition to increasing overall efficiency.
Characteristics of effective organizations
Finance leaders tracking efficiency for their organizations can hone in on a few key areas, including balancing cash burn and ROI, tracking net dollar retention (NDR), and measuring growth vs. profitability. VCs are sensitive to changes in the market, and benchmarking is relative to peers today, not relative to what happened in 2020 or 2021.
Effective organizations balance cash burn and ROI
VCs are no longer just looking at topline growth. They’re also looking at what it took to get there. Among the hard questions finance leaders are asking right now is, what is the optimal team size vs. cash burn in order for a company to grow well? The idea is not to cut costs at all costs. When considering OpEx spends, the goal is creating a balance that ensures longevity and profitability, building the organization in a way that enables it to thrive and not just survive.
Effective organization track NDR
Net dollar retention acts as a leading indicator for changes in the market. This year, many companies are right-sizing their budgets — slashing vendor spends and prioritizing cost savings. Since organizations are cutting many vendors deemed a nice-to-have, closely tracking NDR can help leaders understand whether the tool is viewed as a nice-to-have or a need-to-have. This has broader implications for the company's success and, depending on results, may indicate a need to reposition the organization.
Effective organizations sit in the sweet spot for growth vs. profitability
Organizations that will most successfully raise capital this year have a high growth rate alongside slow cash burn. That’s the sweet spot leaders should push towards. A company growing fast and quickly burning cash should prioritize showing more efficiency before seeking capital. Organizations with low growth rates and high cash burn are likely to struggle. For those companies, significant change is likely needed to survive. Finally, while businesses experiencing a low growth rate and a low cash burn may have a good business model, they may not be a good fit for VC backing.
Is it a good time to fundraise?
If your organization is still trying to put big pieces together, lacks responsible efficiency and growth, or is struggling with product-market fit, it’s best to wait until you have a stronger story. Prioritize efficiency, margin profiles, and getting closer to profitability.
If you have the right metrics in place, capitalize on that momentum. If the market pull exists, and you’re being responsible with efficiency and growth, double down. Organizations with the means to do so may be able to pick up top talent as many transitions are happening in the workforce. Taking advantage of the opportunities now can help ensure the long-term survival of your business.
More fundraising in a downturn tips
For further discussion on fundraising during a downturn, check out Vareto’s on-demand webinar with a panel of VCs. In this discussion, Foundation Capital's Joanne Chen, Scale Venture Partners' Noah Gross, Mastry Ventures' Fatima Husain, and finance expert Mika Kasumov share their insights into how to thrive during an economic slowdown.