As VC money dries up, here's what tech startups in DFW need to do get funded

This text discusses the different types of capital that are available to entrepreneurs.

As VC money dries up, here's what tech startups in DFW need to do get funded

Keith Davidson sees still opportunities for tech startups to raise capital despite a decline in venture capital investments.

Davidson led the technology practice of CliftonLarsonAllen LLP in Texas before he became managing principal. He has also served as a consultant CFO to numerous startups, providing advice on mergers, acquisitions, and other types deals.

Davidson acknowledges that the business owners he works with worry that money will soon run out. He believes that their fears are "probably justified." According to the PitchBook/NVCA Venture Monitor, venture capital activity fell sharply between the first quarter and the fourth quarter of last year due to interest rate increases by the Federal Reserve. The number of deals at the seed and angel stages decreased sequentially in all four quarters.

The first quarter saw a continued slowdown in activity. According to the latest report from Pitchbook and NVCA, late-stage deal values declined for a seventh consecutive quarter to $11.6bn as investors struggled with a cash crunch and resisted larger deals to conserve capital. The report states that venture capital fund fundraising is expected to be the slowest since 2017.

Davidson stated that startups with a “winning product” or a “novel” idea in an established market still receive investments.

Davidson stated that "creating a market takes a long time and is costly." If there is a demand and the purchasing behavior mimics another, then those companies thrive. Investors will be more interested in a market that is new or a product with a long sales cycle. "The appetite for that is difficult."

Davidson sees a growing trend in which large companies, both public and privately held, are investing more in startups that have proven markets and ideas. He said that companies find it easier for them to invest in startups than develop new products on their own.

"It is not only venture capital out there," Davidson stated.

During an exclusive interview with The Dallas Business Journal, Davidson provided further insights into the tech sector. He explained why some startups shouldn't even consider raising venture capital and gave his advice on how to get funding.

You said at a Wisconsin event earlier this year that business owners should sometimes ask themselves if they really need to raise angel or venture capital. How can a founder of a new startup answer that question?

I was working with a client who wanted to open a coffee shop in Dallas. They were looking for investors to help them raise money. The biggest expense was the espresso machine and its equipment. This could be financed through a loan. You don't have to give someone a piece of the company in exchange for something you can secure.

Many people, especially when they read press releases, think that the celebration is about raising money. Well, these people are celebrating the loss of a part of their company. It's not always the best answer. It's a win-win for everyone -- employees, investors, and shareholders. For many small businesses this is not the money they require. Traditional banking has a place in the ecosystem of small businesses and start-ups.

When you need outside investors, it is because your business is not a conventional one and you cannot do anything to make sure you are bankable. You can't use collateral, there's no equipment and you're in need of investor capital to help accelerate your growth. If you're going to need $5,000 or $10,000 to create an app, and you work full-time, then you may be able pay it yourself in the next 10 to 15 years. How can you build an app in six months? And how can your product be better than the competition on the market? Then you'll need outside capital.

You don't have to use this if you want to purchase an espresso machine for your cafe. A traditional bank is a good option. Banks offer loans and credit lines. You may need to fund it yourself, but this is better than losing 25% your business at the start.

You mentioned a statistic from earlier this year that only 1% of the companies who set out to raise money actually succeeded. What can an organization do to become one of those 1% who are successful?

Know your market. What is it exactly? What is it? People like to talk about a million or billion dollar amount. Consider your current market size, whether it's small, medium, or large. Who are your competitors?

Many companies want to raise half a million dollars, but they don't understand why. They think that they need the money. Understanding the real needs is important.

It's never too soon to generate interest from customers, whether they are business or consumers. You don't need to launch a consumer product or app, but do you already have an email list? You can go to an investor, and tell them that you have this widget which will do X. This widget costs this, and I already have 3,000 people ready to purchase at any moment on my email list. You could quickly show this generation. The same goes for businesses. Get a letter from a company that may be interested in buying your service. You want to get something from them that proves their interest. These things reduce the risk to investors. If an investor has $100,000 lying around, then it is not startup or Amazon, but startup or Amazon. The investor can either make 10% per year with little risk, or invest in the start-up and risk losing their entire investment. How can we reduce the risk, make it manageable, and still provide a return that is worth for investors?