Female Foundry Week 83: Too much capital, not enough capital. What are your odds? From the unicorn archives. Female Foundry x Bits & Pretzels.
Welcome to The Week 83, 2023 Edition of the Female Foundry newsletter!
Female Foundry - where investors and female founders meet.
In the news
Utrecht-based Mingle Sport, co-founded by Nicky Rog, raises a €1.25m Seed round led by angel investors and Dutch multinational Rabobank.
Berlin-based Assembly Ventures, co-founded by Jessica Robinson, closes inaugural €70m mobility fund to back founders at Seed to Series B rounds across Europe; London-based Gingo Partners, co-founded by Maria Ivanova, secures €350k to help emerging markets’ founders with early-stage fundraising.
Spotlight
Too much capital, not enough capital.
Venture capital was the fastest growing, by a factor of more than three in value terms, sector of Private Equity between 2020-2021. Now, when the capital flow into VC has been virtually shut, we talk about the 2020-2021 period as a “venture capital bubble”. Is that fair? Is that right?
The capital demand-to-supply model released this week, which measures how much more (or less) capital is being supplied to the US VC market than is theoretically being demanded by startups, shows that the late-stage VC is currently at a deficit of nearly 3x, meaning companies need about three times more capital than is entering the market.
That’s huge.
For comparison, in mid-2021, same model showed that $55bn “extra cash” was being invested into the venture market, and companies were coming back to raise at the quickest pace in the VC history. - At that time, startups would return to the market at fixed intervals to secure new funding rounds, even as the amounts involved grew larger.
Now, when the market's focus is shifting towards efficiency and companies are extending the timeframes between these rounds, the so-called era of “overcapitalisation”, is over. Or maybe, the VC market had never been really “overcapitalised” after all?
To provide perspective, VC activity forms a very small part of the total private equity market. Looking at the end of 2021, (and at the peak of the so-called “overcapitalisation era”) the total value of deals involving VC - the “risky” category of PE that solely invests in startups, still represented only about 10% of the total private equity market in the EU and about 3% in the US.
The topic of overcapitalisation (or the absence of thereof) becomes even more important when the potential return opportunities are great - as is the case with AI.
Conservative estimates say that over the next 7 years, AI could contribute up to $15.7 trillion to the global economy - that is more than the current output of China and India combined (!). While no one knows for sure how accurate those estimates are, for sure, capital required to fully realise the potential of the AI revolution will be significant.
Where will this capital come from if technology is considered a risky asset?
Fundraising
What are your odds?
I regularly meet founders who feel left in fundraising limbo after hearing repeated 'no's from investors and receiving hardly any feedback. If this is where you are, get back to basics. Investing is all about risk. Ask yourself: Do I clearly understand the risks of my investment proposition and know how to manage them? In general, an investor's expectation is that the riskier your proposition, the higher the potential return should be. In the case of VC investing, return = equity stake * value at the point of exit.
But as much as managing risk is important for any business, it is core in the case of startups. Therefore, without a good understanding of the topic, your chances of getting funding, or at the very least, at a good valuation, are limited. If this topic is new to you, start with the "Onion Theory of Risk" coined by Marc Andreessen. - Here is his great talk about it.
The idea behind it is that, as you develop your company, you “peel off” layers of risks and at each financing round only raise the amount of capital needed to remove the next layer of risks.
Coming from the outer layer (Pre-Seed→Series B onwards)
Opportunity size: Is there demand for your solution? What is your total addressable market? Growth of market? Will customers pay? How much? For how long? How concentrated is your customer base?
Founder Risk: Are you and your team the right fit? Team composition, execution capacity, experience, subject matter expertise, professional network, sales-capability, co-founder chemistry.
Competition Risk: How do you stand out in the crowd? Your unique selling points. Dynamics of your competition. How replicable is your solution?
Timing Risk: Is it too early? Is it too late? How big is the window of opportunity?
Financing Risk: Can you navigate funding challenges? How difficult is it for you to raise and in this market? How many additional rounds of financing will you require?
Marketing Risk: How will you break through the noise?
Distribution Risk: Can you sell and deliver your product efficiently? Are you dependent on partners?
Technology Risk: Can your technology work?
Product Risk: What is needed for your product to be valuable? Are there fundamental breakthroughs that need to happen?
Hiring Risk: Who will drive your success? How difficult is it to hire for the key roles that will make your company a success? Will the founding team be able to attract the best talent?
Location Risk: Is your location conducive to growth? Are regulatory blockers? Political instability?
When you bring all these layers together, you realise it’s amazing that any venture investments ever get made!
Now, take a hard-headed look at each of these risks—and any others that are specific to your startup—and put yourself in the VC’s shoes: what could my startup do to minimise or eliminate enough of these risks to make the company fundable?
Over the next weeks I will be unpacking each of the risks to help you with the process and increase your odds of getting higher valuation.
Analysis
From the unicorn archives.
The latest data shows that July saw the lowest funding for current unicorn companies, with $2.2bn raised compared to $6.6bn in July 2022. July had just two companies reach unicorn status – a significant drop from 2021 when the market average was over 2 unicorns per workday (!), and from 2022, when new unicorns averaged more than 1 per workday. Is chasing unicorn status already a thing of the past?
From the Community
Female Foundry x Bits & Pretzels
Female Foundry is an official partner of Bits & Pretzels, a conference that brings together 5,000 founders, investors, and industry leaders to learn and network, taking place on the 24-26th of September in Munich and we have 3 x €879 FREE Attendee passes to give away to the Female Foundry Community!
To enter the FREE ticket draw, submit your interest below. Deadline: August 25, 10pm BST. T&C of Bits & Pretzels apply. I will announce the winners here next weekend. Good luck!
Ticket draw: TechChill Milano | 25-27th of September 2023 | Milano
The complimentary tickets winners are: Nazia (TqKx2D) and Alexandre (xkW1Yg). You can view the draw here. Congratulations! I will get in touch with you shortly.
Hiring
This week hiring:
Opna ➯ Lead, Carbon Finance | Yaga ➯ VP of Marketing | Qbeast ➯ Product Marketing Manager.
See more jobs on the Female Foundry Job Board.
Founder & Investor Meetups
Europas is about to raise the prices for its annual awards on the 31st of August. If you do not want to miss out on the opportunity to pitch your startup in front of VCs and socialise with fellow founders during Web Summit in Lisbon in November ➯ Apply here.
Wednesday, August 23, Berlin ➯ Startup Lounge, Paris ➯ Apéro Startups | Thursday, August 24, Berlin ➯ "Rise & Grind" Network Berlin, Amsterdam ➯ Founders Mesh.
It was a great week. Enjoy the rest of the weekend!
Agata
Written by Agata Leliwa Nowicka, an investor, a startup adviser, a two-time entrepreneur, and a founder of Female Foundry based in London.
♡
Thank you Jacob for your help with research. Suggestions? Drop me an email.
Check femalefoundry.co for more fundraising tools and investor content. View other Female Foundry articles.