A Tale Of Two Startups – Venture Capital Funding Recalibrates For 2023

Key Insights:

• Colorado is uniquely positioned and will remain a bona fide startup hub for tech in 2023, especially for women founders.
  
  
• While venture capital firms may be looking for deeper indicators of success, money is still flowing for early-stage companies and those with proven fundamentals.
  
  
• Distribution of VC funds dislodged from major tech cities during the pandemic, but those trends are reversing.
  
  
• Successful startups have “the juice” or a secret sauce of grit, strategic planning, and often times, sheer will.

For tech founders nationwide, 2022 was no walk in the park. Continued war in Ukraine, inflation, and additional macroeconomic factors built up anxiety and dread for many, but the tech sector was atypically impacted by reduced access to venture capital, which was down more than 30 percent last year.

However, we live in a world where more than one reality can exist at once. Overall venture capital funding in the US may be down, but even with a global pullback in funding, the Colorado startup scene is uniquely positioned, as if in a bubble that is operating differently than its surroundings, chugging along despite adversity.

According to the most recent PitchBook NVCA Venture Monitor report, along with Nashville and Philadelphia, Denver went against nationwide trends (as we do). Founders in the three cities raised amounts of VC near the record-smashing levels of 2021, which only reinforces the nature of Denver and Colorado as breeding ground for successful companies.

Colorado’s Economy And Tech Growth, A Symbiotic Relationship

If you have spent any time on the BWB blog and know about our undying belief in the CO tech startup ecosystem, you may be thinking that we are leaning too far towards toxic positivity. On the contrary, we find a sense of obligation to unearth and share alternative narratives, unique perspectives, and tales of success that go against the grain. Clearly there are negative indicators present in the current market, but in generalizing, we risk missing out on authentic stories of growth and success that coexist with this challenging time.

Supporting our position, Colorado has seen year over year growth in the number of female-led businesses starting, and venture capital money has “provided a foundation for those enterprises to break through the so-called ‘glass ceiling.’” For three years running, Colorado has held the No. 1 spot for women-led startups (raking in $3.3 billion in funding over the last five years), many of the state’s largest organizations representing workers are led by women, and the Denver-Aurora-Lakewood area ranked as the No. 2 major U.S. metro area with the most female business owners. This is one example of growth out of many coming out of Colorado; we see you ladies!

As the tech industry is a major driver of Colorado's economy, it could act as a key cushion if a recession does occur. Of the $1.8 billion raised in Q2 2022, up roughly 185% from the same period in 2021, $505 million went to Crusoe Energy Systems, followed by Velocity Global raising $400M in series B funding, Pax8 raising $185M in series G funding, and Guild Education with $139M raised in series F.

What Does It Mean For Tech Talent Looking For Work?

For at least a decade, startups have lived in the shadow of a mixed perception. On one hand, we love a story of a killer team that started small and blossomed to boisterous revenues with their world-changing idea. On the other, there has always been a mentality that joining a startup inherently brings about more risk than working for an enterprise level tech company. Considering recent layoffs trends, we wanted to get to the bottom of it and ask, is that still true?

Statistically speaking, it lines up that a handful of startups among thousands have not found success or reached the next level of growth, but overall, startup leadership understands the value of a talented employees and operating from a lean perspective as they are trying to grow. What we are proposing is that startups can offer more stability and reliability than over-bloated tech giants that hire in droves and drop people by the thousands.

Local investment firm Antler’s founder and CEO Magnus Grimeland recently told Built In CO, “tech companies are laying off workers faster than at any point during the pandemic; 150,000 jobs were cut in tech in 2022. Simultaneously, these tech layoffs are already spawning a new wave of startups. We received about 65,000 applications in 2022 [for our six-week startup generator program], a strong upwards trend. The application rate of Q4 was about double the rate of Q1. The companies that will rule our future are being created in these days, weeks, and months all around the world; I am putting my money and time into backing the world’s most driven founders from day zero.”

That sentiment gets to the heart of our outlook, that great companies are not only constantly being created, but there is ample support and a bright future ahead for many of them. Technologists looking for work can take solace in this growing trend.

Seeking Stability – How Is Venture Capital Recalibrating in 2023?

We sat down with Elyse Kent of Access Venture Partners and Matt Blomstedt of Springtime Ventures to capture a bigger picture of startups, and learn more about how venture capital firms are navigating the current moment. They highlight the strength in their processes for backing founders with good fundamentals, and emphasize the ongoing strength of Colorado startups.

We also asked our interviewees why tech candidates looking for their next role should more heavily consider startups as a place where they can develop their skills and grow their careers. Here’s what they had to say…

Question 1

BWB: What is going on in venture capital funding in tech from a high-level perspective, what are you seeing in the market in terms of venture capital funding in tech? Are you being more careful with how you distribute funds?

Elyse: "One of the biggest differences from this year as opposed to last year is that we are looking for businesses with commercial viability and proof of customer traction. We look for founders who are cognizant about financial modeling, more realistic about packaging those products, and truly understanding the markets that they could sell to.

In general, we want to work with founders who are more thoughtful about how they approach commercialization. When money is expensive, you have to actually look at the levers that you can pull to reduce spend, yet still achieve product market fit. It's no longer burnout at all costs, it's about thoughtful leadership and go to market approach to achieve customer attraction."

Matt: "We never get scared to do a deal if it fits all our boxes and meets our criteria, but the consistent challenge we have is evaluation and entry prices for us versus evaluation expectations from founders because we invest at the pre-seed stage and seed stage.

What we are seeing unfortunately is with a lot of companies that raised early rounds in 2020, 2021 and early 2022, is they raised at such a high evaluation to begin with that even if they kill it and hit their metrics over the next 18 months, in a way, they are back to where they started on how they are being valued by later stage funds. So that has hindered us in a way.

Aside from that, the bar is higher. We want people who are capital efficient. For us, we invest almost exclusively in healthcare, logistics, and fintech, which means domain expertise goes a long way, but we’ve never been scared to back exceptional teams who are going after really tough problems. If they get it right, the market opportunity is very large."

→Takeaway: With investors taking extra steps to assess business viability and whether or not a founder has realistic plans, there is increased confidence that funded startups will hit their goals and receive additional runway.

It's no longer burnout at all costs, it's about thoughtful leadership and go to market approach to achieve customer attraction.”

Question 2

BWB: If a startup has good fundamentals, what does that mean to you? Can you share more about what criteria goes into assessing a company's fundamentals or what growth metrics you use to analyze their strategy?

Elyse: "Proven leaders with market knowledge and fundamental business skills are very hard to find. When backing early or first-time founders, it’s more so that we're trying to judge if consistently perform, that the founder has a good grasp of what’s going to happen, and if we’re able to build trust with that founder about their business. We need to understand that they are going to be realistic and don’t have rose colored glasses about the business."

Matt: "If a company has history of paying customers and revenue, we absolutely look at that. We also look at the forecast even if they do not have revenue right now, in order understand and align on how they think and what it takes to take to make a business.

It is so early in funding these companies, that the team has to have this experience, almost like a they have a secret…it goes back to the team, they have a secret on why and how something has to be done differently, and why and how their product is going to be ten times better for the problem they are solving. They have got to have the ambition to make it a billion dollar plus business, and that is what really drives the decisions for us is those fundamentals.

Like Lizzo, it’s having “the juice,” and sometimes it’s hard to quantify that. One thing they typically have in common is the ability to articulate this vision of a future that does not exist yet. Sometimes it sounds crazy today, but they are able to go into the weeds and explain how they are going to get there, and what it is going to take, and they have data to back up all of this.

We have a slide deck- 10-12 slides, and one founder showed up with 150 slides, including a slide or two to answer every single question we had. We notice the time, effort, thought, and energy that was put into that and that they know it so well, which in turn jumpstarts our excitement and belief in the idea.

→Takeaway: A combination between realism, preparation, and belief gives founder the secret sauce for success, or said otherwise, startups with good fundamentals not only have a plan, but also capture a certain grit and gusto for tackling the issue they are hoping to solve.

One thing they typically have in common is the ability to articulate this vision of a future that does not exist yet… They have got to have the ambition to make it a billion dollar plus business, and that is what really drives the decision for us.”

Question 3

BWB: When startups overcome adversity, what types of adversity do they face? Do you feel this element of story and pushing through adversity is ultimately what makes your team say, okay, that's someone that we want to work with because they've done XYZ…?

Elyse: "If their initial product is not gaining traction and they listen to customers, then give the customers what they actually want, and then they start to gain traction, that's a great sign, even if they kind of blew the initial seed funding in order to gain that clarity of where they actually need to fit in the market."

BWB: It’s almost like you are identifying what founder archetypes tend to succeed or stand out. Is there a theme or is overcoming adversity something you need to be a successful founder?

Elyse: "If I had to say anything, I would say that being realistic is the number one quality we look for. We do not like sugar coaters."

Matt: "My view here is anecdotal, but to be honest, it is harder for first-time founders and female or founders of color who are just starting out. Unless you have done it and you have made money before you raise, it can be very difficult. If all else is equal, getting funding can be the hardest for black women. We know that it is not right and there is bias at play, and we can see how those founders have to grind harder or prove more to be noticed and funded.

38% of our founders are either women, immigrants, or identify with underrepresented groups in tech. I personally feel our female and immigrant founders do more with less and are more capital efficient than some of their counterparts. There is something to be said about that, and how there is a certain type of founder that usually based on their background, it was harder for them to get to this point. They may have a chip on their shoulder, and we like that, so a lot of our best companies are led by founders of more diverse backgrounds.

There has been progress with the increasing number of money managers who identify with underrepresented groups in venture capital funding management, and this somewhat combats the issue of relatability that female and non-white founders face when presenting their product or business ideas to a group of investors. In other words, there has to be an understanding of how the product or service will sell to the targeted market, and an increased diversity in those who manage these funds can broaden what we see as a viable business idea."

→ Takeaway: Unsurprisingly, it is an uphill battle for underrepresented founders in tech, however, things are getting better with more women starting companies and increasing diversity of money managers, which leads to an increased diversity of businesses and founders. 

Question 4

BWB: How can tech talent better evaluate the companies that they are talking to? What is your response to the thought that startups are an uncertain move for growing your career in tech?

Elyse: "I think employees should do their own diligence on companies just like we do on. Not only do you have a right to, and you'll see senior leadership do that constantly, but junior hires may not be aware that they're also in the driver's seat when it comes to educating themselves about the business. When you are interviewing, your knowledge of the business will also impress the hiring team.

For example, if you're joining an early-stage company, look into who the investors are in the round? Are there any with access to follow-on funding, or similarly, what is the runway with a reasonable growth rate? This should give you an understanding of how much runway that business can maintain, and if you’re able to see past variables and there is runway and a financial plan, that can support making a decision.

Other questions you can easily find, did they hit the goal they had last year? Compared to the year before- what does the runway look like? Are their goals realistic next to the goals they set and hit from the year before? The second thing to look into would be what other talent has been attracted to the company? And third, who are they losing to? Is it a market leader or another startup that is the biggest competition?"

Matt: "I would start by talking to their investors. If somebody reaches out to me and wants to talk about a company, I will be transparent with them because no one wins if you are not transparent. Talent placement is one of the most rewarding things we can do as investors, every now and then we help place someone directly and it is awesome. I would recommend talking to people at the company as well as investors, and ask about the prospects of growth and their culture. Talking to as many people as you can that will be straight with you is the best way to assess a company you might potentially work for."

→Takeaway: Do your homework. It is a candidate's due diligence just as much as a company's to learn everything you can about where you might be working and do your best to get answers to your questions on funding, runway, culture, your role, and anything else that is important to you.

Talking to as many people as you can that will be straight with you [about the company] is the best way to assess a company you might potentially work for."

demystifying the startup stereotype

With over 22 years in the business of helping tech companies of all sizes grow and hire top tech resources, we can say that unfortunately, your chances of being laid off are not astonishingly less working for a big tech company than for a startup because anything can happen. However, what’s been shared today certainly calls for a reflection on how we ascribe certain stereotypes to certain types of businesses, and that there is always another side to the story.

Venture capital investors are clearly putting forth a concerted effort to analyze startups for their health, longevity, and viability in newfound ways. Inherently, investors want businesses they back to succeed, especially startups with great ideas and determined founders. To that end, it is important to ask yourself if you are analyzing the health of an individual business and the opportunity it is offering you, or if you are basing career decisions around preconceived notions and narratives about what it’s like to work for a small or emerging company.

The bottom line? Do you own research, always investigate opportunities equally and fully by talking to anyone and everyone you can, and don’t judge a book by its cover when it comes to working at a tech startup.

Here at BWBacon Group, we know and live what you are experiencing as an employer or job seeker in Denver, Boulder, Dallas, San Francisco, New York City or any of the other cities we work in. We believe great recruiting starts and ends with understanding people.

If you have any questions about living, working or playing any of the areas we serve, please contact us. We are happy to help. Seize the day, every day, that’s what we say!