The Biggest Challenge for Venture-Backed Companies
There is always fires to put out. This advice will help you tackle the most pressing ones
Building a tech startup is challenging and requires relentless dedication. At any given time, there are several obstacles to be dealt with, and founders may experience difficulties prioritizing their time.
But the significant entrepreneurship challenges are also quite similar between companies, regardless of stage, industry, or geography.
I’m going to dive into the most common challenges in tech startups that I have observed across thousands of cases in the Nordics, gleaned from my role as an investor. I’ll also give some concrete advice on how founders can solve them.
The top three challenges are:
Recruiting
Recruiting is the most significant challenge faced by startup founders and one that exists across stages. The problem consists mainly in the lack of software developers, especially in Western Europe and US tech hubs. In general, it is hard for young tech firms to compete with big global brands for talent, but it is a necessary component for commercial success and increases your chances of an exit.
Founders can make it more attractive for new hires and existing employees by creating warrant programs, flexible work hours and remote options, and fostering a great, supportive culture. But they can also appeal to skilled individuals through a flat organizational structure where seniority is less important and raw competencies win. I believe co-ownership and skin in the game create the largest appetite for your workforce. So, creating an employee stock ownership plan (ESOP) is recommendable. A 10% ESOP allocation should be sufficient.
Nonetheless, due to the economic downturn we are experiencing right now, we are seeing a large pool of talent being released back into the market — especially in tech — because many companies have cut workforces by 10–20%. Now is an excellent time for founders to hire skilled labor — at least for those well-capitalized.
Customer acquisition and retention
The second biggest problem for founders is customer acquisition and retention. This is a never-ending issue and something founders continuously work on, but there are moments in the company lifecycle stage when the problem is more evident and dangerous.
Such a time often occurs after the company has closed a large financing round and needs to deploy that capital for good use. The company will try to acquire many customers fast because they need to impress (deliver good returns to) investors, hence ending up paying much more per newly acquired customer than otherwise. (Customer Acquisition Cost increases).
Simultaneously, the company may push customer acquisition so much that they need to extend its offering to new customer groups or market segments. However, doing so may cause the company to acquire customers who do not see adequate value in the product and therefore are more likely to churn. Therefore, new customers may be of lower value (Lifetime Value decreases).
In sum, the company has spent a considerable amount of capital and has gained some revenue, but it has also made the business much less sustainable due to worsened unit economics. At this point, investors’ willingness to participate decreases and the valuation will drop.
This is a scenario you would want to avoid. To do so, founders should first ensure that they have a proper product/market fit, i.e., a customer segment or group with high sales conversion rates and a high and sustainable LTV:CAC ratio. Second, founders should not raise more capital than needed from a cash flow perspective.
Fundraising
Raising capital is tough for most entrepreneurs as it requires a lot of time and planning. Luckily, there are many funding options in the private market besides venture capital nowadays. These include grants (especially for deep tech and climate tech startups), business angels, family offices, corporate venture funds, accelerators, crowdfunding, revenue-based financing, co-investment networks, etc.
There are, however, various opinions on how to properly fundraise. My advice is that you need to start 6–12 months before you need the money on your account and that you should be very diligent in your efforts to get the best terms and long-term relationship with your investor(s). If you want to read more about how to fundraise in uncertain times, I wrote an article where I go into specifics and give some concrete advice to founders.
Generally, one of the reasons why entrepreneurs struggle with raising capital is because they overestimate the investors’ appetite to jump on their business and thus wait too long to begin their fundraising. Cold outreach to investors is never an easy method to raise capital, but doing so 6–12 months before you need the money is fine because investors will perceive it as you seeking out the right investor matches and building relationships.
By the time you open your financing round, you will know the investors, and they will know you, which makes the process smoother.
Besides these problems, founders also struggle with COVID-related disruptions, internationalization, competition, regulation, and supply chain issues, to mention a few.
In the world of entrepreneurship, there is always a fire to be put out. I hope this advice helps you tackle the most pressing ones.
Disclaimer: The views expressed in this article are non-political, non-commercial, and solely my own. The content here is for informational purposes only and shall not be understood or construed as financial advice.
About the Author: Joachim Schelde is an Investment Associate at Scale Capital, a danish venture fund investing €1–3M in Nordic B2B tech startups at Seed/Series A and helping them win in the US.
