The Nasdaq has recently fallen 33.9% from its all-time high set in the past year. Simultaneously, the Dow Jones lost 9.4% of its value; interest rates in the US - and in other advanced economies - are rising at a pace that is already difficult to track in an attempt to stop galloping inflation; the volume of venture capital investments is declining, and the value of enormous tech companies - private and public alike - is rapidly falling. Momentarily, it seems that the bearish market (a drop of 20% or more from a peak recorded by any index on the stock exchange) is upon us, and although the above cyclicality in the capital markets is not a new phenomenon, none of the players, from venture capitalists to entrepreneurs, old and young, seem to have learned the lesson. None of them, so it seems, has implemented past lessons from such high and low tide times.
One cannot ignore the fact that the last 13 years have been the longest bullish market in the history of capital markets. However, at the end of each ascent, there's always a decline, and to mitigate the damage during these low times, lessons must be learned from past experience.
Precisely at this point, entrepreneurs and investors of the current generation are failing. In my opinion, for several years now, venture capitalists and entrepreneurs, young and old alike, simply don't care about the real value their founded companies are supposed to generate and can produce. In other words, they do not focus on building long-term businesses that would benefit humanity, far from it. Instead, they focus exclusively on inflating the value of the companies "on paper," among other things, by continuing to inject capital into them with one single objective: Selling the company to the highest bidder or floating it at the highest possible value. Of course, all this aims to realize their shares at the highest possible value. They don't really care what happens to the company after the IPO or sale. To prove a point, the shares of many companies that went public just before the beginning of the declines in the capital markets, simply crashed after the IPO.
On the altar of never-ending capital raising and inflating value for the purpose of a public offering or sale, venture capitalists and entrepreneurs sacrifice the most important goal of all: building real businesses, with actual products, with stable recurring clientele, businesses that generate profits and cash flow, rather than just burn through them.
Capital raising, particularly on the scale of tens/hundreds of millions of dollars from existing investors who return to invest in a company in series C or later rounds, has become harmful rather than a blessing. Startups have become spoiled, and some would even say they are behaving piggishly, and the available funds are not beneficial to them. On the contrary, the availability of funds only harms them. The best thing a startup can do for itself, its employees and its investors would be to stop raising money from external sources at some point and learn how to produce money on its own. Therefore, startups must get out of the comfort zone created by venture capitalists, show maturity and responsibility, respect the money already invested in them, and learn how to build a profitable business, over time without further fundraising.
Raising capital at the outset is necessary, but every company needs to identify the right moment when it can and should learn to do without external funding. That would be the only way to create and run a genuine business. Raising capital can never be the ultimate goal. Building a profitable business is! If startups and VCs don't realize that, they are in for a resounding failure when faced with reality, as is currently happening.
The author is founder and co-CEO, Prytek
Published by Globes, Israel business news - en.globes.co.il - on January 9, 2023.
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