The cost of capital for founders is going up. Way up.
It is happening as you read this – there will be less equity available for growth companies, there will be even less soon, and then there will be even less once the already settled funding announcements dry up.
As we head into a (probable) recession with falling valuation multiples and costs for equity-seeking founders continuing to rise, it’s pretty clear that this isn’t the same funding landscape as it was two weeks/two weeks/months/quarters ago.
The cost of capital to enable founders to grow their business simply went up, as did the expectations associated with their existing growth capital.
Capital comes down to people and choice. Every dollar that comes into your tech company is a founder’s choice to take and someone else’s decision to give it to them. The person who hands over that dollar has expectations about how much they will get back and when. By ignoring those expectations, the end result could be… bad to say the least.
Founders need two things to succeed with that capital*: the enough amount to grow effectively and the advice to help them do so efficiently.
* Bonus if that capital is non-dilutive and provided based on the company’s healthy recurring revenue, courtesy of actual paying customers.
While traditional, conservative business structures (such as restaurants, manufacturers, and even farms) have known inputs and outputs, investing in companies with those known upper limits is easy to match and model for a bank. The tangible assets can be used and predictable growth is reassuring.
But software changed the game.
Worldwide distribution. Minimal incremental implementation costs. Different expectations about success.
Venture capital has helped fill the funding gap for a small number of these companies, but the surrounding financial products have failed to keep up with the needs of high-growth technology companies. Even venture capital backed companies are excluded from the existing institutional banking system.
The missing piece of traditional financial infrastructure has been the ability to accurately assess a growing technology company for risk, considering the quantitative and qualitative inputs and forming a picture of the impact on outputs.
tractor has built this IP and continues to refine and facilitate the new type of financial products for tech founders and their companies.
What does this changing landscape look like?
It’s not all doom and gloom for technology company founders, especially companies with recurring revenues. But the considerations for financing your technology business have just changed, and so have the expectations associated with that financing.
There is always room for different financing options. Certainly, venture capital is important to many companies and equity financing will eventually pick up again.
But the opportunity to see a wider range of financing options, to see more companies grow without shareholders completely wiping out their equity in the company in the process, to see more balance in the ecosystem – this is what our team is excited about. left for the future.