If you’re scaling a startup, you’re going to be thinking about financing. But things have changed a lot in the past decade. Today’s VC investors are more selective, more streamlined, and more focused on the fundamentals. The ground has shifted. If your business will be looking for investment in the coming years, your approach must shift too.
Investment in startups has been up and down in recent years. Disruption caused by the pandemic was quickly followed by a surge – with Europe seeing a record-breaking 2021 when it came to tech investment. Market correction in 2022 was followed by a period of more conservative spending – a seven-year low. Luckily, many commentators expect that 2025 and 2026 will be good years for fundraising.
Evaluating market potential and growth prospects
For a startup founder, however, it’s not these global totals that really matter. The key is understanding exactly how and why the investment landscape and investor habits have changed. Because they really have. We’ve noticed this from being on the ground helping ambitious Irish startups looking to fund their next phase of growth.
The number of startups progressing to a Series A round has fallen in recent years. Here in Ireland, deals in the €5 million to €10 million range fell by 44% in Q2 2024 compared to the same period in 2023. The journey is harder because of the knock-on effect from realities such as reduced IPO activity, fewer acquisitions, and higher interest rates. Attitudes have shifted too. VCs have become more cautious when it comes to evaluating the market potential and growth prospects of startups.
The emphasis today is on finding companies that can demonstrate real-world traction and a validated business model. Where the value used to lie in your idea, as demonstrated by an MVP, it now lies more solidly in your track record. This makes a lot of sense when you think about how the rise of AI and low-code or no-code platforms have made it so much quicker and easier to prototype a concept.
Startup isn’t simply about having something innovative to offer, but whether people are prepared to keep paying for it and whether your business model is profitable. Because of this, startups making under €10 million in annual revenue and without evident potential for growth are going to be seen as a risk. Even those making a few million a year may find it easier to raise money from angel investors rather than VCs, who traditionally expect to make back 10 times their investment.
Work on your operational excellence
While mere idea generation has become less appreciated, the skill to execute an idea has become much more valued. An efficient and scalable model, demonstrated by revenues and a pipeline, is more attractive to today’s risk-reducing VCs. Not only do they tend to specialise, we also see them keen to invest more in each company – by waiting for companies to become more established and by investing more than once in the same venture. Remember, they have to do their due diligence, assessments, and checks regardless of the size of the investment, so it’s efficient for them to invest more in fewer companies – a minimum of €5 million and more likely €10 million plus.
Founders considering fundraising need to build an experienced leadership team around themselves and focus on developing operational excellence in order to deliver sustainable growth. Courting potential angels early on and inviting them to join the board as a non-exec is a tactic we have seen work for scale ups. Often these angels will go on to lead a group investment round, their closer involvement in the company providing confidence and streamlined due diligence.
It’s sometimes easier to raise more
I can think of several clients of ours that had originally planned on fundraising around €1 million and have now decided to instead aim for €10 million to better align with VC habits. There’s also been an increase in companies fundraising on an ongoing basis rather than following traditional funding rounds. This approach provides more flexibility and a steady cash flow, allowing them to take advantage of funding opportunities as they arise.
So, what does this mean for founders who believe they are sitting on a fantastic business but are still looking at relatively low annual turnovers? How do you get yourself to the next stages and into a position to be investable? I believe you must develop a strategic mindset that is laser-focussed on investment-related targets from day one. Once you understand where you are heading and how to get there, look at cultivating a mix of alternative funding sources such as angels, government grants and seed funds, crowdfunding, P2P financing, revenue-based financing, and strategic partnerships. Combining these approaches can help you extend your runway while you prioritise traction and profitability.
