After a recent period of significant growth, rumors are circulating that winter is looming over the startup industry. Startups have previously raised large amounts of capital based on the potential for success alone, and many worry that this rapid growth is no longer realistic. No startup is immune to the economic challenges ahead, but early stage startups seem to fare better than companies in the later growth stages.
Due to new market conditions, investors and entrepreneurs are moving away from the “growth at all costs” atmosphere that previously dominated the startup industry. Early stage entrepreneurs understand that cash availability is limited. To adapt, they raise smaller funding rounds, build the company little by little and create real value before turning to follow-on funding. Unlike late-stage startups, which may struggle to raise enough funds to account for their higher valuation, pre-Seed and Seed startups keep their valuations manageably lower.
Getting to the next milestone is what matters most during this period. Initial startups deliberately define their next goal and raise the ideal amount to achieve it. With this new, pragmatic growth method, early stage startups can take the time to prove themselves. They can present a healthy process of company performance and progress instead of diluting themselves too early with high valuations.
However, the Seed stage is not completely immune to the challenges of this cautious marketing period. Consumer needs are constantly evolving, and there is no way to ensure that the idea that an investor originally backed will succeed in a future market. However, the innovative spirit of an extraordinary entrepreneur will find a way to adapt his product to the current needs of the customer.
Investing in people over ideas is an important way to avoid the unpredictable market. Compared to the teams, product is overrated. Seed and pre-seed startups are more insulated from the external factors that more easily affect pre-IPO and public companies. The product that the startup offers still has the opportunity to develop before strategically entering the market. While the idea that investors originally fund is bound to evolve, the passion, resilience and adaptability of the team are the only constants that can determine the company’s success.
Despite global events, early stage startups are still building strong foundations through the uncertain market by accomplishing modest, achievable goals. These companies are growing successfully, just at slower, more deliberate rates.
Nimrod Cohen is the Managing Partner of TAU Ventures
