Why 2017 Investments Will Take Local Companies Farther With Less

There was a point in recent history, around 2014, when it seemed like investment firms were throwing money around.

“It was growth at all costs,” Upserve CEO Angus Davis told us earlier this year. “That was tolerated in 2014. I don’t think that’s the case nowadays.”

That time is long gone. Davis says that 2017 is a more difficult time for tech companies, especially software companies, to secure funding. At the same time, limitations sometimes come with certain investments.

“The pendulum has swung the other way,” Davis says. “The bar has been raised for SaaS companies, in terms of the amount of revenue traction that investors want to see, before they’re willing to invest.”

The good news, according to Davis, is that bigger steps can be taken with each round of funding a company completes. Upserve announced earlier this month that it raised an new round of funding from Vista Equity Partners.

It is now easier for entrepreneurs to be more efficient with capital in order to scale a business up: Davis’s advice is to follow the public markets relevant to your type of business. Movements, essential ones that embody the many startup mentalities, can happen faster and easier without the constraints that sometimes come with big investors.

This year, Davis sees a trend of massively unprofitable startup companies going public. He two recent examples, of analytics and machine learning company Cloudera, which went public in April this year, and of Snapchat, in March.

“Companies that are raising money, the unicorns, are realizing that sooner or later, they’re going to be valued in the same way that public companies are valued,” Davis says.

Also, some of the unicorns — startups valued at more than $1 billion — can be “boxed in” by the expectations of investors, he says. As companies begin to scale up, the leadership begins to see how their businesses compare to publically-traded companies. In the later stages, leaders can gain easier transparency into how their peers are doing because many of them are public companies.

“As entrepreneurs, it’s helpful to have benchmarks,” he says. “In the early stages, it can be hard to find benchmarks for things like, ‘How am I doing? How sticky are my customers? Do we make enough money on every deal?’”

Davis says that seed funding is the most available right now. And because the overall economy is doing fairly well, wealthy people are increasingly doing angel investments where they previously were not. He and many company founders know that first step to securing investors can often be the most difficult.

Eric Groves, co-founder and CEO of Alignable, told us earlier in the year that he believes that it’s a combination of diligence in networking, and having a unique product or service. Alignable’s path to investment depended on a years-long connection that Groves made with a West Coast investment firm.

“The guys on the West Coast said, ‘Great, come back to us when you’re at scale.’ When we were at scale we came back to them. I had done this before and had pretty decent networks.”

Procuring investments in a new business takes a lot of persistence, Groves says.

“At the end of the day, they’re looking for big opportunities and people who are taking a unique approach to solving problems,” he says.

Ro Prakash, co-founder of the hyperlocal small business networking platform Townsquared, told us in a recent interview that authenticity is a big attraction for many investors.

“My biggest piece of advice is to pursue something you’re really passionate about,” Prakash says. “If you do that, you’re invariably going to find something that the market really needs or wants. From there, you can craft a solution, and if the market is large enough and depending on the investment you’re looking for, getting investments becomes that much easier. You’re constructing something from a place of knowledge as well as really having a nuanced insight that could solve the problem.”

Prakash says that Townsquared has been exceedingly fortunate in securing the financing they have so far. The pieces don’t always fall perfectly into place, however, and he says his experience is that knowledge about how to grow a business is really the main skill – with that, investments will come.

“Be honest about what it is you want to do,” he says. “Don’t fake it. Go after something you care about. Make sure it’s something you’re passionate about and then continue. Investors will, in my view, given the right set of parameters, be really attracted to that.”

April Nowicki is a contributor at Street Fight.