Anthony Mouchantaf, Head of Capital at RBCx, on how tech startups can succeed in tighter financial times.

After years of easy money conditions, it can be unnerving to find oneself in a bear market. Rather suddenly, funding became more scarce, loans more difficult to access, and everyone seems to be talking about a recession.

Startups of all sizes and stages must learn how to respond to this new reality, so we turned to experienced venture capital investment strategist Anthony Mouchantaf, Head of Capital at RBCx. Prior to working with us, he was a venture capital investor with OMERS and, before that, the founder of Rthm, a venture-backed mobile health and consumer genetics company.

We asked Anthony to host our first-ever educational webinar to help founders through this difficult period. Over the course of an hour, he shared exclusive insights on how we got here, what comes next, and how startups can flourish even in a bear market.

Here are the top 5 takeaways from Anthony’s crash course on how to survive a bear market:

1. You can thank the pandemic for getting us here

Today’s bear market, a period of monetary contraction, follows an environment of unprecedented monetary expansion sparked by the pandemic. Central banks, in an effort to safeguard economies, significantly eased interest rates and indulged in Quantitative Easing (QE).

These actions made money cheap and encouraged spending, but eventually led to high inflation. According to Anthony, they also “contributed to an unnatural inflation in tech asset values.” This is because traditional assets became less appealing to investors who were incentivized to seek out higher yields in tech.

To curb inflation, central banks began to raise interest rates again and make debt more expensive. As a result, we find ourselves in a bear market. Now, we see the inverse phenomenon. Investors are fleeing what they perceive to be riskier assets and are incentivized to return to traditional assets.

This creates a challenging environment for startups. However, there are still paths to success.

2. Carryover dry powder is your friend

“Luckily, venture capital has a very long tail, and the funding ecosystem will take a long time to respond to the new macro realities,” says Anthony. “A lot of the stimulatory aspects of the bull market are still in place now and will remain in place for the next few years.” Translation: Don’t panic just yet.

Anthony explains that when venture capitalists announce a new $100 or $200 million fund, they don’t actually take immediate possession of that money. Rather, it’s more like their limited partners gave them a guaranteed IOU they can call in at any time. A lot of these IOUs were issued in looser economic conditions, but they’re still good now when venture capitalists (VCs) need them to invest in startups.

“They have a ton of money to call on over the next few years— there’s a significant supply of around $300 billion,” says Anthony. “Which is a really, really good thing if you’re a startup.”

However, it may not feel that way to founders looking to fundraise because VCs are slowing down their rate of investment. Startups must respond accordingly.

3. Startups should refocus on fundamentals

Now’s not the time to get distracted by ‘nice to haves’ that aren’t core to your business. Founders need to prioritize fundamentals that will make them attractive to investors and lenders.

“There’s going to be a flight to companies that have three core characteristics: these businesses are fast growing and have significant year-on-year revenue growth, have significant growth margins… and have capital efficiency,” says Anthony.

Startups looking for funding or loans can expect to undergo even more due diligence on these fundamentals than in the past. “You’re going to have a lot less FOMO in the market. Investors are going to pause and take their time and really dig into your business,” he says.

Anthony also has advice specific to pre-revenue startups: “It’s all about narrative and telling the story of why your business, when the time comes to turn on revenue, will have those core characteristics.”

4. Growth margin and capital efficiency are king

“Growth margin is incredibly important,” says Anthony. “Over this bull market we’ve seen companies grow revenue with negative gross margins, some of them with very low gross margins. That’s probably not going to fly going forward.”

Startups must also figure out how to efficiently grow the money they already have— particularly if it doesn’t look like any cash reinforcements are imminent. “That may be a commentary on your business model… what do you need to spend on to scale,” he says. “But that also may be a commentary on product-market fit… does it cost you a ton in marketing to acquire sales?”

5. Don’t follow the pack— do what’s best for you

In response to an audience question about whether it’s better to fundraise now or wait it out, Anthony said startups should think hard about whether “they really want or need to fundraise and take on external capital.”

While fundraising is often seen as the natural next step for many tech businesses, it’s more important than ever to consider whether it’s right for you and the constraints that come with it.

“When you take in external capital, especially if you take on external capital from venture capitalists, you’re bringing in outsiders who have an incentive structure that’s probably not aligned to yours,” says Anthony. “They have basically five to 10 years to get escape velocity on a business and exit that business.”

Growth positive startups may want to think twice about what they’re getting into if they take on VC funding and all the expectations that come with it. “If you have a positive business that’s growing at 20 per cent or even 30 percent, it’s a real question whether you want to take on these external investors that are going to push you to grow 100 per cent year over year,” he says. “Or do you want to continue to own this thing yourself?”

Hungry for more insights? We’ve got good news

Anthony’s talk on how to survive a bear market was just the first in a new series of RBCx educational webinars. These valuable sessions will allow you to tap into some of the industry’s top minds from the comfort of your own home or office.

To get invites to future webinars, reach out to your RBCx Banking VP today.

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.


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