We are coming off the strongest private investment market in history, with funding, valuations and transaction volumes at all-time highs in 2021. Entrepreneurial companies, large and small, were considering the public marketplaces—whether through IPOs, SPACs or other transactions—and the global unicorn herd grew to its largest numbers. Funding has been pouring into venture capital (VC) firms over the past few years and is being deployed in larger and larger tranches. We all kept asking about the sustainability of this market and hoping for the best.

However, the start of 2022 has highlighted a set of risks with significant potential to undermine growth and performance for the remainder of the year and perhaps beyond. Conflict in Ukraine, higher inflation and interest rates, supply chain challenges, and a decreasing labor pool both in terms of headcount and level of engagement are already increasing uncertainty and consumer/investor confidence. The first few months of the 2022 have been challenging to the entrepreneurial community with the Federal Reserve signaling potential earlier rate hikes and other policy-tightening measures that typically have a negative effect on investor confidence in the life sciences sector.

In Q1 2022, according to CB Insights' State of Venture Q1’22 Report, global funding has fallen 19% to US$144 billion from the prior quarter, which is the steepest percentage decline quarter-over-quarter in almost a decade. Fundraising remains relatively high in the US, according to PitchBook-NVCA Venture Monitor (Q1 2022), with 199 funds raising US$73.8 billion in limited partner funding commitments. Early- and mid-stage valuations are also up. But the recent data from CB Insights points to reasons to be concerned with a slowing down in both valuations and exits for late-stage deals—clear signs that we could be moving into murky waters. We could see this uncertainty expand into the rest of the private markets in 2022.

While VCs reserve their cash to help their portfolio companies, they will need to make some tough choices in terms of how they deliver support. For example, they will need to decide if they should spread their reserves over multiple companies or pour more cash into a select few. Unfortunately, not everyone will get the financial support needed. Consequently, growth and return on investment are stalled.

So now that the breaks have been applied to market enthusiasm, what can a start-up entrepreneur do to sustain development and growth? Here are some suggestions:

• Closely examine the projects included in your plans and projections. Prioritize those with the greatest opportunity for short-term and meaningful impact.

• Consolidate your top resources into the top programs/markets.

• Consider pausing projects that will take significant additional capital, time and resources.

• Return to the posture you had at the very beginning of the company’s existence: Be a bootstrapper. It is amazing how much bootstrappers accomplish with little resources.

• Look for resources globally. Talent is everywhere and often at lower prices.

• Carefully manage the cash flow and runway analysis – every day!

• Learn from the Covid-19 shutdown. Avoid unnecessary expenditures (e.g., space, travel), and empower workers to be efficient. The trick is to also maintain your company’s culture and unity.

• Remember that investors are looking for the strongest opportunities with less of focus on “flyers.” Make sure your pitch (1) addresses significant unmet market needs; (2) is laser focused; and (3) has a clear vision of the resources/processes to reach success.

• Look for creative funding sources but try not to enter a toxic deal—which, unfortunately, is sometimes unavoidable.

• Think about debt, purchase order financing, grants and incentive programs as possible options.

• Consider joint ventures and direct investment opportunities, due to the significant amount of money available in international markets.

• Examine restructure partnering arrangements, employment contracts and lease commitments, which we have seen many clients utilize.

• Pair your technology with companies that have more resources, such as through M&A opportunities.

Founders have many ways to reduce cash burn and extend the runway when funding is tight. Your current advisors and investors are your best resources and advocates. With proper focus, you can make significant progress as well as create value. That’s what entrepreneurs do: survive and advance!

ABOUT THE AUTHOR

John Pennett leads the National Technology and Life Sciences Group at EisnerAmper. He has 35 years of public accounting experience and is a frequent writer and speaker on biotech topics. He is the publisher of Catalyst, a newsletter that covers business and technical issues affecting entrepreneurs. John has led the accounting, auditing and strategic advisory work for more than 50 IPOs, private financing and mergers and acquisitions with an aggregate valuation in excess of $3 billion, and has assisted private companies going public through a SPAC. Additionally, John supports entrepreneurial organizations around the country with content, resources and program development, and serves as a mentor to several early-stage companies.

Contact him at john.pennett@eisneramper.com or 732-243-7140.

Image courtesy of CordenPharma