According to a recent research report by HCS Capital, called Market Outlook: A review of key data from Q2 2023, Global funding for startups is in decline.
However, the data, gleaned from CB Insights and Pitchbook, also shows that this trend has been partially offset by the fact that more investment is happening in the areas of generative AI, and despite the tough climate, 18 new unicorns have been made in Q2 of 2023. Even more interesting, is the fact that Unicorns appear to be on the rise in Europe.
The study states: “Another compelling trend is Europe’s increasing significance in startup funding, claiming a 24% share, according to CB Insights. Meanwhile, the USA continues to lead with a 36% share.”
A number of operatives that were booming in 2021 have seen significant contractions, and ‘shedding staff’ headlines have become only too familiar. This is also coupled with the data that suggests courting investment for new ventures is significantly more difficult than it was three years ago.
Despite this, companies are scaling – and funding rounds are happening. They may not be the megarounds of 2021, but they are significant, because they tell the stories of marketplace trends and demands, and the companies that succeed, do so, because they have certain characteristics that will ultimately make the marketplace more resilient and robust.
We caught up with several industry experts that include venture capitalists and startups, as well as recent funding round winners, to find out exactly how they won in the investment stakes – or what, conversely, caused them to invest in these times.
A robust growth plan is essential, says the successful entrepreneur
Julio Pernía Aznar is the CEO of Bdeo, a technology company that provides visual intelligence for motor vehicle and home insurers. He says showing a strong investment roadmap that involves R&D, growth strategies and ways to improve customer centricity, are essential elements for investors.
“Bdeo recently secured 7.5 million euros in our latest funding round. This significant investment will play a pivotal role in propelling our company’s growth and development. It will empower us to refine our cutting-edge technology, extend our market reach, and enrich our offerings in the insurtech domain.
“When raising new funding, we prioritized several key factors. First and foremost, we aimed to enhance our product by investing in research and development. Market expansion was another critical consideration, with a focus on both entering new regions and strengthening our presence in existing markets. Additionally, we are focused on customer acquisition and improving user experiences, not only for our clients (home and motor insurance companies) but also for the final user of part of our product, the policyholder.
He adds: “Team growth, compliance, security, and strategic partnerships also featured prominently on our agenda. Ultimately, our objective was to leverage this funding to reinforce our position as a leading insurtech company.”
Remember the FIVE Ms, says the investment and VC facilitator
Richard Abrahams is the CIO and Co-Founder of Sprout, a company that connects underserved, private investors to a curated selection of leading venture capital funds. Abrahams is a chartered accountant by background, and has spent the past 10 years working on Private Equity and Venture Capital deals. He is now on a mission to change the face of the private markets, starting with venture capital funds, by unlocking access to the best funds by lowering the minimum investment ticket from millions to thousands.
He says: “When evaluating investment opportunities, venture capitalists and investors often look at what I call the “5Ms.” These key criteria help determine if a startup has what it takes to build a successful and scalable business:
- Management – The quality and track record of the founding team is critical. As an investor, you want to back founders who are experts in their domain and have the vision and leadership abilities to build a billion dollar company.
- Market – Investors look at the size, growth trajectory, and overall excitement of the market a startup is targeting. The bigger and faster growing the market opportunity, the more appealing the investment.
- Machine – A startup’s proprietary technology and intellectual property can give it a differentiated edge. Game-changing tech that solves a real pain point provides a competitive advantage that is difficult for others to replicate quickly.
- Momentum – Rapid growth and traction underscore that a startup’s product or service resonates in the marketplace. Metrics showing strong early adoption and repeat usage help validate the business model and future potential.
- Money – Capital efficiency is the order of the current market conditions, and understanding how much has been previously raised and what it was used for (and if it was used sensibly) is important to investors. On top of this, a well thought through funding and spending plan for this fundraise is vital to convince investors you’re the best place for them to invest their money.
Abrahams adds: “Evaluating startups based on these 5Ms provides a broad guide for investors to identify and vet the most promising opportunities. Companies that score highly across all five criteria have the ingredients needed to achieve exponential growth and outsized returns.”
Challenge and innovate: Disruptors are scaling fast, says the Founder
Edward Halsey is the COO and Founder and Taveo.com – formerly, branded as Hubb – a commercial insurance broker using its proprietary AI, automation and data science platform to offer businesses fairly priced, usage-based broking. He believes that insurtechs that are willing to tackle the challenges and problems of the insurance industry head on – often through innovation and technology, are winning in the investment stakes.
Halsey says: “Insurance has been slow to adapt, often overlooking the transformative power of technology and big data. Savvy investors get it – backing firms that are shaking up this stale industry is smart money. Want to attract investors? Challenge the old norms and solve real customer headaches.
“If you’re maxing out AI and ML, you’re already ahead of the curve.
Start-ups leveraging new technologies to their full potential will be the most attractive prospects to investors, as we’re the ones making the most drastic changes in the market with the most potential upside.
“Customers are fed up with confusing, costly, and subpar service – sparking reduced trust in brokers across the board. We need to change this.
Companies effectively harnessing emerging technology to be customer-first will reap the rewards when the time comes to seek investment.”
He adds: “It’s high time for a broker revolution. Put customers first, nail the tech, and investment will follow.”
React decisively to market changes, say the venture capitalists
Gareth Jefferies and Alex Pavlov, are both Partners at RTP Global – a VC that invests in early-stage technology founders. The team is actually made up of former founders, engineers and data and computer scientists, economics graduates, philosophy majors, university professors and even triathletes.
Jefferies says: “With earlier-stage companies, profitability is not the only thing investors care about in today’s current climate. Investors are interested in the terminal value of their investment. And if you’re profitable, in most instances that means you’re leaving growth on the table. So, while growth-at-all-cost is no longer a viable strategy and economics of course matter more, investors ultimately want to see whether you are either solving a problem or have a no-brainer product for B2B or B2C customers.”
Pavlov says dynamic founders are a great attribute for a startup.“We look for decisiveness and action from the founders we invest in. I want to see that they acted based on the changes to the current market environment, not just that they have plans to. This decisiveness shows that they understand that running a successful business is about responding to the changing situation, whether that’s to seize opportunities or minimise risk. If they’re only able to talk about what they will do, then all I hear is missed opportunities.”
Investment is as much about partnerships as it is about capital, says the CEO
Matthew Crummack is the CEO of Domestic & General, an established domestic P&C insurance provider in the UK. He says those seeking investment, should also be considering long term partnership goals with their investors.
“Securing interest from investors is not just about securing funds, it’s about building partnerships and relationships that can help your startup grow and succeed. You need to show that you’re genuinely excited and have a clear vision for what you want, while remaining calm and grounded as the path to investment is rarely a straight one.
I’ve learned that one of the most important competencies for any business leader is being able to relate to people, their beliefs, and experiences across all spectrums of life. Just as investors conduct their due diligence on your startup, you should also be researching potential investors and ensure that they align with your values and vision. Different investors have different investment criteria, so conduct thorough market research to understand your competition, target audience, and industry trends to show them that you have a deep understanding of your market.
An investor can also be a reliable source of business advice and may have a strong network that you can draw on. They want to work with founders who are open to feedback and willing to adapt if needed, so be receptive to suggestions and show them that you are fully committed to the success of your startup.”
He adds: “No one will look twice at a company that hasn’t nailed its value proposition, so highlight what sets you apart early on, by emphasising your unique selling points and competitive advantages. Be transparent about your financials, including tech development costs or any intellectual property considerations – investors appreciate honesty and a clear path to profitability.”
Joanna England is an award-winning journalist and the Editor-in-Chief for Insurtech Insights. She has worked for 25 years in both the consumer and business space, and also spent 15 years in the Middle East, on national newspapers as well as leading events and lifestyle publications. Prior to Insurtech Insights, Joanna was the Editor-in-Chief for Fintech Magazine and Insurtech Digital. She was also listed by MPVR as one of the Top 30 journalist in Fintech and Insurtech in 2023.