Indeed, investment figures are reported to be an estimated $45bn down from $85bn in 2022. With less capital available and more cautious attitudes amongst investors, many founders find themselves under pressure as we enter 2024. So, what are their options when looking for capital?

The state of VCs

Many of these founders are facing a very different investment climate than for earlier rounds. Investments in 2021 amounted to a massive $621bn, an increase of 111% on 2022. The priority during this period was growth at all costs – the money was there to support and empower founders.

However, in the last year we have seen investors become more cautious with their capital, opting for sustainable financing models, and prioritising realistic business valuations and growth trajectories. If VC funding stays muted in 2024, we expect these priorities to remain, requiring many ambitious entrepreneurs to look elsewhere to fuel their growth.

Reaching the end of the runway

More startups are nearing the end of their runways, a time that is notoriously difficult to secure equity funding under the best of circumstances. During this period, founders may be offered unfavourable terms, including lower valuations, which can lead to significant equity loss. Bridge rounds for immediate financial relief became more prevalent in 2023, but these can impact future negotiations and valuations.

How, then, can founders fulfil immediate capital needs to fuel growth, without having to sacrifice more equity or control of the company? Looking at operational changes to buy time is the place most will start. This usually entails moving away from a high-growth model towards profitability and sustainability, achieved by business model adjustments such as cost reduction and strategic realignments. A bootstrap mentality is crucial, emphasising efficient resource utilisation and alternative funding to extend the runway.

However, there’s a risk to this short-termism where growth falls by the wayside. Not only as it means companies won’t achieve the growth rates needed to secure higher valuations at future rounds, but a lack of innovation can lose their edge against a competitor. Another option for founders is to explore alternative funding models which allow them to continue fuelling growth, without giving up more equity and control.

Alternative financing options

A highly valuable alternative to equity investment for businesses with recurring revenue models is revenue-based financing. This model allows startups to trade their annual recurring revenue (ARR) for non-dilutive financing. Trading limits are based on historical data and expected ARR, making it a sustainable financing option which increases in leveraging potential as the company grows. For startups with predictable revenue streams, this tool is an effective long-term growth strategy as it enables the reinvestment of revenue into the company, while founders retain full ownership and control.

Other alternative financing options, like raising venture debt, present specific challenges in these circumstances. Though it can be an attractive option for fast-growing companies due to its flexible nature, venture debt typically comes with a higher interest rate and shorter repayment terms – and ultimately it means taking on debt which is risky when a startup’s liquidity is already diminished, and it is at the end of its runway. Crowdfunding is a great way for startups to raise capital for launching or growing quickly, while also gaining market validation. However, it can also be time-intensive and expensive, and therefore easy to lose momentum on the journey to achieving the end goal.

Short-term survival vs long-term success

Many founders will feel up against a wall when looking to raise capital. However, short-term survival can’t be at the expense of maintaining momentum and continuing to fuel growth. To choose the most appropriate financing model in this climate, founders must assess how much they are willing to sacrifice and what they can leverage to fuel future growth. Assessing the balance of risk, reward and ownership is how founders will make the best financing decision for their business.