The smart changes Start Ups should make before 2023 to raise capital from UAE Family Offices or VCs
This is not the first time we have seen an economic downturn hit our startup community in the UAE, but each downturn has its own unique characteristics – and no one really knows just how long it will last. Elon Musk predicts that this downturn will be 12 to 24 months, which is just perfect for a UAE family office or VC seeking to double or quadruple returns to LPs above what they would otherwise be.
While there is uncertainty, there is also near certainty of a few things. Net net, now is a very good time to be investing in startups or looking at emerging fund managers. Look at how all these realities impact the performance of a VC fund. Young or inexperienced founders and investors that were not active before the recent Covid boom should remember what the fundraising climate was like in the years before.
Startups in the UAE, will lower the size of their next funding round, which in turn lowers pre-money valuations. Startups will make that money last for close to 24 months or more; a smaller round means more austerity. Overspending by startups is the cancer of a booming economy. No more offering every employee to take an Uber home every night in Dubai or lavish sponsorship on Sheikh Zayed road. Layoffs from large tech titans and startups alike hit the pause button on the talent war and create opportunities in the UAE. Execution is all about people. Really good startups are born and developed at this stage of the game. Startups can hire talent at lower price points and total compensation packages while implementing austerity measures making cash go further and get more done. More talent leaves the large tech titans and head to start ups. Less VC money to go around is a good thing. Weaker VCs fail to raise LP capital and large VCs slow down investing while waiting for the lag in valuations of private markets to catch up with the knife drop in public valuations / multiples. VCs and Family Offices tend to also reserve more capital for their existing portfolio companies or holding. Historically some of the best startups are founded during recessions. Think Microsoft, Airbnb, Pinterest, Electronic Arts, Slack, WhatsApp, Square, Uber, Instagram, and many others. The multiples VCs and their LPs [Family Offices] made in these companies are much higher because of the recession timing of their early investments. Technology continues, even if the stock market crashes and in fact, customers need to buy and pay for cost-saving solutions or new technology that increases sales and productivity. The new startups born during recessions often have "must have" solutions driven by the need for every startup and large company to increase performance now that there is a squeeze on multiples and valuations. A return to DD. This includes, calling customers, examining the quality of each revenue stream, expenses, truly understanding sales cycles, true in and out cash flows, off sheet reference calls, etc. During the booming spring and summer of 2021 deals got done in days or hours with no DD led by inexperienced, touristic VCs. When the stock market crashes, the venture deals return to real DD and take weeks to close rounds. It takes time to do the work. Work is good. Good startups should complete a rigorous self-audit looking at every single line item of expenses, literally line by line, and agree on a new operating plan. Founders need to figure out how they’ll get to cash flow break-even with the cash they have in the bank now, or recap raising a round and create a new operating plan with that new amount of cash. Founders need to decide which vendors need to be truly paid, renegotiate 180-day payment schedules and re-negotiate with everyone. Pay less! Spend less! 12 to 18 months cash runway from each round becomes min 24 months runway. Startups must recognize which family offices and VCs here in the UAE are just taking meetings and which ones are writing checks during early 2023. Many VCs and even Families are pausing new investments during the catch-up lag period of private markets lowering valuations to mirror the public valuations. The stock market is real-time and drops like a knife. Private markets must take in the arrogance of early VCs and their founders pushing bubbly valuations and let the real world kick them around and watch burn push the bank balance to zero before deals get done at valuations that reflect a new set of lower multiples. That is the lag. Experienced VCs are playing the lag and, oh yeah, they are taking meetings. Just because you have 10 meetings with families or VCs in DIFC or ADGM next week does not mean you really have momentum for your raise. So now you start to feel the heat of that burn rate. Founders should be skeptical that they are just taking meetings and not getting cash in the door. Get cash in the door. Certain types of startups, such as international, hardware, or capital-intensive companies with longer time horizons to revenue and profitability (think semiconductors), have a harder time raising funding. Recognize which kind of company you are and test the waters by talking to family offices in industrial's or commodities, or new VCs with dry powder. There is a funder for every good company even during the darkest days. Not changing your plan is stupid. Change your plan. Review everything. Evaluate every single dollar your startup is spending and have discussions with your cofounders, family offices and VCs to run a process reviewed by multiple people and advisors. This is healthy stuff to do during any economic cycle. The 30-day rule. Startups should make decisions within 30 days to lower burn rates and position for default alive or raise capital to extend their runway to 24 months. Complete the review and implement the new plan within 30 days. It’s hard to fire a guy and see him crying in his car in the company parking lot two hours later when you know he has a spouse and a 3-month-old baby waiting at home, but this is the hard work. Better to save some of the passengers on the Titanic rather than sink every man, woman, and child to the bottom of the ocean. A good startup CEO knows how to fire. Look, this is hard stuff – but it’s also an opportunity. Every company has a bad hire that should be let go to where they can be more successful.