The current economic downturn has certainly impacted venture capital. According to Crunchbase, VC funding saw a YoY decline of 53% in Q1 2023.
Economic uncertainty and raising interest rates are just two of the many factors that are changing VCs’ attitudes toward potential investments. Still, considering how much dry powder there’s in store, the VC space is practically bound to recover.
If you want to capture venture capital in 2023, you’ll need to adapt to this new paradigm. In this post, we’ll cover the 5 operational trends VCs are looking for.
But before diving in, there’s a question worth diving into: What are the factors making fundraising so challenging in 2023?
Why Is Raising Venture Capital in 2023 so Challenging?
There are many factors behind venture capital’s current climate. Some have affected all facets of the economy and venture capital is just one of them.
These factors include:
- The War in Ukraine
- Rising inflation in the US
- The Federal Reserve raising interest rates
- The long-term effects of the COVID-19 pandemic
Other factors are sector-specific. For instance, the collapse of Silicon Valley Bank, which jeopardized the liquidity of thousands of promising startups.
Additionally, the fear of bloated valuations may prevent VCs from investing in seemingly solid, late-stage companies. According to Crunchbase, Stripe and OpenAI’s funding rounds made up 38% of Q1’s total late-stage investment.
At this uncertain time, VCs aren’t freezing their spending, they’re just investing smaller amounts and looking for companies that give them the security they need.
Most VCs aren’t willing to invest in companies whose growth strategy relies on a high burn rate and have no path to profitability. No matter how promising their product may be.
Instead, VCs are looking for founders with:
- A solid business model
- The capacity to balance cost-effectiveness and growth
- A clear path to profitability
5 Operational Trends VCs Are Looking for in 2023
The current climate doesn’t mean that your company won’t be able to fundraise. You can still stand out as a promising investment to today’s risk-averse investors.
We recommend you:
- Focus on sustainable growth and conscious spending
- Reconnect with your value proposition
- Implement automation strategically
- Focus on reducing churn
- Stay transparent and strategic with your data
Beyond fundraising, adapting to these operational trends may be the best way to grow in the current climate.
Sustainable Growth & Conscious Spending
In 2023, VCs gravitate towards growing companies that manage their burn rate and focus on efficient spending. Profitability isn’t a must, but careful resource allocation is - and a clear path to profitability is important. In fact, many VCs are advising their portfolio companies to keep a runway of at least 24 months.
The days of growth at all costs are over. This context requires a shift towards sustainable growth. Adopting this mindset will help you lengthen your runway and equip your team to plan for the months ahead, even without new funding rounds.
Signs of a sustainable growth strategy include:
- A shift from aggressive talent acquisition to careful headcount planning
- Application rationalization as an antidote to uncontrolled SaaS spending
- A marketing strategy that focuses on cost-effective lead generation, not just rampant acquisition or brand awareness.
Reconnect with Your Value Proposition
Artificial intelligence and other tech trends are currently capturing attention and funding. But that doesn’t mean that rolling out AI-powered product features is the winning ticket to capturing venture capital. Instead, you should focus on shipping features that solve important user pains.
This is the time to reconnect with your core value proposition and concentrate on the problems you’re solving for your ideal customers.
Profitability isn’t a must. But having a solid path to profitability, driven by unique value and a clear business model will give VCs the certainty that they need.
Automation as a Sign of Operational Efficiency
Growing companies that demonstrate a strong focus on operational efficiency have a higher chance of attracting investment. One key aspect that VCs are looking for is the strategic implementation of automation within a company's processes.
Strategic automation allows you to:
- Keep your team members focused on high-value, mission-critical tasks
- Prevent over-hiring
- Easily gather useful data on your internal processes
- Reduce human error & ensure operational consistency
Most commonly, competitive companies leverage automation for:
- Customer onboarding, and offboarding
- Reporting, KPI monitoring, and forecasting
- Low-level customer support
- Lead generation, scoring, and nurturing
A Focus on Reducing Churn
A high customer acquisition cost can severely handicap your company’s finances. Especially when you’ve got limited ability to extend your runway. We’ve known for a long time that customer retention is cheaper than customer acquisition and that improving retention can have an outsized impact on a company’s bottom line.
In fact, an often-quoted 1990 study found that a 5% improvement in customer retention could produce a 25-95% increase in profits.
With that in mind, a focus on customer retention rather than acquisition can be a cost-efficient path to growth. And if your company commits to that strategy, VCs will note it as a sign of a sound strategy.
VCs are increasingly looking for companies that not only collect and analyze data but also have a clear plan for how they will leverage it to drive growth.
Gather data on all your business processes and make it readily accessible to relevant teams and stakeholders.
Use data to:
- Set priorities
- Promote accountability
- Facilitate cross-team collaboration
- Have an objective perspective on your company’s health
Data is also vital because VCs are conducting deep due diligence before investing. So being able to provide accurate numeric insights for everything that’s going on at your company will be a key differentiator.
Building a data-driven culture, independent of funding rounds, will help you get the detailed information investors need fast and frictionlessly.
The Platform for Better SaaS Spending
Your SaaS stack plays a fundamental role in your company. But it’s also one of your largest expenses. According to our collected data, SaaS represents about a third of the average company’s cloud spending. And informal SaaS spending may represent up to 40% of your IT budget.
You can’t grow sustainably without taking control of your SaaS stack.
Cledara is a SaaS management platform designed to help you monitor your SaaS expenses and eliminate unnecessary costs. With Cledara, you will:
- Get a centralized view of all your SaaS subscriptions
- Identify how much use and value each tool is bringing
- Streamline permission management
- Avoid shadow IT
- Set an approval workflow for software purchases
- Easily identify redundant apps and unsubscribe with one click
- Manage your software invoices and reconcile them automatically
- And much more
Reduce your burn rate and maximize your software ROI. Book a demo Cledara demo today.