Why is it so difficult these days for growth entrepreneurs to find new funding?

Why are many growth companies struggling to find new funding?

“For many years, startups and scaleups trying to raise money could benefit from a great appetite from investors, ranging from business angels, to venture capital and private equity firms. Interest rates were very low, and the economy had been performing well for decades, so investors had a lot of money to spend. Hence, funding rounds were relatively easy, even for startups with merely an idea. Founders of high-growth firms could raise capital at high valuations. This has changed dramatically as the economy has gone through a period of uncertainty, high inflation and increasing interest rates. The risk appetite of investors went down, resulting in a sudden struggle for many young ventures to raise new capital.”

More and more growth companies are struggling to raise money

Yannick Dillen, Professor of Entrepreneurship at Vlerick Business School, explains what causes this new reality, and which alternative options entrepreneurs have to continue their growth path.

How can entrepreneurs deal with this new reality?

“First, you can still try to raise money. However, you will have to accept that this money will come at a much lower valuation of your business than initially anticipated. This has the benefit of having new cash available which allows you to continue to strive for growth. The downside is of course that existing shareholders will find the value of their shares to be worth less. Nevertheless, for some, it will be the only chance to survive as bank loans are not granted easily to young growth companies.

Another option is to bootstrap as much as possible, meaning that you try to minimise costs by slowing down investments in product development, IT, sales and marketing, and new hires. As such, many firms hope to generate a positive cash flow which will give them some breathing space to postpone a new funding round until the economic climate improves again. That is of course easier said than done as your turnover still needs to remain stable with fewer investments.”

For how long will this new reality last?

“Unfortunately, nobody has a crystal ball. Overall, I believe we have witnessed an unhealthy situation for quite some years already. Valuations of growth companies were often much too high and the focus on turnover growth was too dominant. A return to that old reality is not desirable. The ultimate goal should be to end somewhere in the middle: a situation where growth firms can attract capital to boost their innovative growth initiatives, whilst at the same time receiving more moderate valuations, so the focus can shift back to healthy top-line and bottom-line growth.”