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Tech unicorn CFOs: Winter is coming
Winter is coming. In the very least it's getting chilly for startups hoping to raise money on the private market.
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Businesses aspiring to reach unicorn status, a private market valuation of at least $1 billion, are finding it harder to raise the capital needed for such a lofty aspiration.
In October, Business Insider reported that 1.3 "unicorn" companies have been created every week in 2015.
Unicorns have been helped along by mega-rounds of funding, valued at $100 million or more. In the past four months, 37 companies have raised $100 million mega-rounds.
Four CFOs of well-known unicorns sat down at the MIT Sloan CFO Summit to discuss the current state of startup fundraising and why they believe "winter is coming" for private market fundraising.
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Their companies, Kabbage, Actifio, SimpliVity, and Thumbtack, have all reached $1 billion valuations while focusing on distinctly different areas of technology.
"Winter is coming because investors are hunting birds. I’m sure we have all been at conferences with bankers who are talking about it. If people are talking about it, it's already happening or is coming, because that's the way it works," says Thumbtack CFO Servaes Tholen.
"Anyone who is raising money, raise it fast; it’s getting harder by the week. I kind of like it, we are lucky because we closed a big round two months ago, and it means it helps me focus our operating team," he says.
Tholen warns his employees that they need to make money last. He tells his team that it could be a couple of years before they are able to secure more funds.
"It helps focus the mind. We are working on a budget for next year and we use discipline, and we use focus, and we try different things, the upcoming winter helps us with focus," Tholen says.
Tholen isn't alone in his assessment of the current VC-backed funding market. Kevin Phillips, CFO at Kabbage, admits that his company took extra funding it didn't need at the time because "capital markets are tightening up and the spread on capital markets is widening."
"We took in extra money because we got this great valuation. You have to build great fundamentals. At the end of the day you need to have a business that can make money," Phillips says.
"When we look at the budget scenario for next year, one situation says it's puppy dogs and rainbows, and the other situation says it’s getting chilly out there, and we are prepared to move from one to the other," he says.
As a native of Boston, Kelliher jokes that he doesn't like the term "winter is coming" because of last year's record snowfall in his hometown.
Kelliher stops short of saying winter is coming but does warn startup founders that it is "getting harder to raise capital."
Kelliher says investors are looking more closely at profitability in the private and public markets than they have in the last several years.
He believes a tighter market for raising capital is a good thing for businesses.
"It forces good discipline. Cheap money is not a good thing for building value long term. People tend to waste it or take too many risks, whereas a tight market makes you spend effectively and maked money last a long time in order to make sure the business model is going to work. It’s good discipline to have," Kelliher says.
Beaudoin acknowledges that there will always be money floating around in one form or another.
He says to secure that money "you have to prove you're executing against the market opportunity you have."
Tightening market conditions are forcing companies to focus more on execution and driving value to the market, Beaudoin says.
He says startup founders should closely monitor public companies, IPOs, and regular financial markets. It shows that you have to execute well against strategy and your operating plan.
You can reach James on Twitter @JamesKosur and follow CFO Insider @CFOInsider.
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