The effervescent start-up scene in Silicon Valley has inspired local tech entrepreneurs and heightened expectations in the last couple of years. Investors are looking for fast growth, while entrepreneurs, emboldened, are searching for sweetheart deals for early stage investments to finance the burn required for such growth. While we have yet to witness a local Unicorn, there have been a couple of notable investments last year (notably SmartBill, Marketizator and Vector Watch).
Now, with trouble in sight overseas, what does this spell for the budding national start-up scene?
To be honest, not much at this point, but does signal a shift.
For investors it is a cautionary tale. For years, local investors have taken a skeptical approach of investing only in established businesses. But the desire for higher returns is an incentive to overlook unit economics. Romanian VCs are betting that by getting in at the ground floor they will bank on buyouts or IPOâ€™s from foreign money. With VCs ( Venture Capitalists) and equity funds from US and China turning to a more cautious approach it may be time to take a second look at that financial plan. You may be in it for the long haul.
If the cash burn exceeds current forecasts, and it usually does, you will be forced with a difficult decision fork up more cash, or cut your losses. The reasons are twofold. On one hand, the lack of Series B alternatives as well as no public appetite for domestic IPOâ€™s makes relief from private money hard to come by. Also considering the notorious reluctance banks have to funding local start-ups, and Series A local investors may find themselves in a bad position if conversion doesn’t come soon enough.
That is a troubling thought, even worse, it’s hard to acknowledge. People like to bank their return: from founders, and down the chain to angel investors, and VC, the tendency is to look at the last valuation and based on your stake add that amount to your current net worth. That makes things harder once you are involved.
For entrepreneurs, that means that now, more than ever, they should place their bets in sustainable growth, specifically the maximum growth rate a startup can maintain internally without the need to seek external financing.
Bootstrapping should be the new buzzword for local tech entrepreneurs, and one they shouldn’t have any difficulty adapting to. We should take an example from our parents and grandparents, their experience in making the best of available resources could easily be translated to business acumen.
Also, they should carefully consider public grants. Thankfully, the EU’s initiative to boost entrepreneurship has led to an abundance of funding for businesses. Many are disheartened by the amount of paperwork required. They shouldn’t be, soon enough investment will require a heftier discount for early backers and as price of private money increases, the opportunity costs of extra paperwork will seem smaller by comparison.