How Can Entrepreneurs Ensure Their Startup Thrives in 2023?

Although the Covid-19 pandemic had a detrimental effect on many companies, many more entrepreneurs saw it as an opportunity to bring new exciting products and services to the market. In fact, according to a joint report from NatWest Group and CBI Economics, over 800,000 businesses (an increase of 22%) were created during the pandemic, and more than 89% survived their first year. Adam French, Partner at Houghton Street Ventures, Co-founder at Scalable Capital and guest speaker on our Entrepreneurial Finance online course, gave us his insights into gaining venture capital funding, how startups can become more responsible and inclusive, and where he sees the world of startups heading in 2023.

“I’m Adam French, I graduated from LSE back in 2007 and after seven years in investment banking, I decided to start my own business called Scalable Capital, a FinTech business offering online investment services. I’ve recently moved to the other side of the table and now I’m an investor at Houghton Street Ventures, the in-house venture capital fund for LSE alumni entrepreneurs, so I’m investing in early-stage businesses which have been founded by people who have gone to LSE.”

“We have a very close relationship with the School and sometimes we end up helping with various parts of courses and giving our insights, so for the Entrepreneurial Course I recorded a video with Dr Juanita Gonzalez-Uribe explaining what we look for as a venture capital investor when we’re looking at a business; what we think is important, what the pitfalls are, and what the learnings are. This was a great opportunity to share with the students what’s going on particularly because the venture capital market is very interesting for a lot of people but also because it is changing quite significantly right now.”

“I think it’s a broad term, but essentially if you think about what a business needs to be able to launch, it needs resources and some of those resources are human capital, but you also probably need money, so finance becomes a core component of building that business from scratch. There are many different ways in which you can seek finance to bring your business to where you want it to be, and venture capital funding happens to be one of those types of entrepreneurial finance. It’s essentially finding the people who are willing to provide money so you can try and grow your business and that money is the risk capital, it’s money that they’re putting at risk to help you to grow your business and ultimately for them to hopefully make a nice return on that capital.”

“This is a really good question and there’s a lot of research in this space and a lot of different people have different opinions. Having been on that journey myself, building a successful business is part science, part art, and part luck. In the very early days, there’s a lot of issues that usually arise from the early team and the ability of the team to work together and to share the same vision. This is why venture capitalists like to invest in teams who have worked together before. It helps to de-risk some of the execution risk of having the right people in place. When people are pitching to us about the team side of things, it’s helpful if you are able to provide some certainty on some of the people you’re bringing on board and make sure you have certain people who are experts or very knowledgeable in areas of the business you might not be. I think the other big thing that people end up running into problems with is when you start out. You have a hypothesis on what your business is trying to do, what problem it’s solving, and what solution you’re building, but sometimes you don’t find ‘product market fit’. You’ve built something, you give it to the clients and they don’t like it so you try again and again hopefully before you run out of money, you find something that people love. Finding this is a lot of trial and error. Many businesses don’t reach that stage before they run out of money and therefore, they fail.”

“As a founder, when you’re starting out it’s very much a mindset you need to have. It’s very hard to prove early doors that you are an inclusive and responsible company because you’re often building a business with your friends or colleagues and so it doesn’t look very inclusive in the beginning just by the nature of your own networks not being as diverse as they could be. Having that mindset and understanding that when you look at successful companies and the way they have gotten there, it’s by operating in a diverse and inclusive way. Make sure you have it at the front of your mind and you’re putting it into everything you’re designing, your team but also your products as well. If you want to build a big business, you need to build for a lot of people, and it makes sense to have a diverse set of minds around the table.”

“So, 2023 is really interesting because the macro environment has clearly shifted over the last 12-18 months. If we look over the past decade, one of the clear themes was that money became almost free, valuations were very extended, and it was easy for entrepreneurs to raise capital and we would see them receiving very high multiples on their revenue. Unfortunately, as the economy has started to cool, inflation rates and interest rates have started to rise, and a recession is now looming, that story has now completely changed. And so, businesses which have already been operating and raising a lot of capital are in a predicament because at some point they’ll need to raise capital again and the valuations they were getting before are going to be very hard to continue unless they are growing extremely fast. There will be a lot of painful conversations to be had at a board-level for startups that need to raise further capital. They’re going to have to do it at lower valuations as they did before which means founders will get diluted, staff will be underwater on their stock options, and layoffs will be happening. But it’s not all gloomy because the world always needs entrepreneurs to be innovating and building. What we saw in the backend of this Bull market which has been going on for the past decade was crazy, so I think we are returning to normality. I think the priorities of entrepreneurs will change, they’ll still come to market, but it won’t be growth at all costs, it will be about how to gain profitability and how to grow effectively. I’m excited about the new normal because a lot of the noise falls away and we focus on businesses that make money, things that people actually want and true innovation. The good companies and good entrepreneurs will continue to do well.”