This article is written by Carlo Gualandri, CEO and founder of the fintech scaleup Soldo. The author makes an analysis on the evolution of capital markets and the rules of engagement for investors for startups and scaleups. He does so from his point of view as an entrepreneur of a fintech company financed by large venture capital funds and from the observatory he has living in London which, (despite Brexit), remains the European capital of business innovation and venture capital funding.
2025 is the year of reckoning for start-ups and scaleups. The rules of the market and investment have changed and the time has come to prove that businesses are sound, that they reach the point of sustainability and that above all, growth can be sustainable.
Until 2021/2022, and since around 2008, we have been living in a scenario where interest rates have progressively fallen to zero in the major markets, even becoming negative in the eurozone, first as a reaction to the financial crisis and then as a response to the pandemic that caused governments to inject large amounts of capital to support economies and thus companies. This created a scenario where, from an investor’s point of view, the more traditional asset classes no longer yielded and so there was a shift of attention, and therefore also of capital, towards riskier but also more promising solutions, such as, for example, the shares of big tech and venture capital, choices also driven by the so-called ‘FOMO’, an acronym that stands for ‘fear of missing out’, i.e. fear of being left out of the games and investments that would have generated substantial returns. It is therefore no coincidence that, even looking at Italian figures alone, 2022 was the year in which the largest investments in start-ups were recorded, with a total of 1.86 billion euros (source: Growth Capital – Italian Tech Alliance) as a result of the long wave of 2021.
This injection of capital at all levels: stock market, large venture capital funds, smaller funds, led to a growth in the availability of money in search of the best deals and consequently to a growth in the valuations of start-ups and scaleups, including those of companies with questionable fundamentals. However, this was not a development related to the individual company but to the whole ecosystem and by mid-2022 the whole scaffolding began to wobble. Interest rates quickly rose, as did inflation, and the money available for investment in innovative companies started to fall and so did the valuations of companies and those who went for investment rounds at that time found very different conditions or no deals at all. Many companies ended their run, not so much because they were bad projects, but because the pattern had changed. There was a return at that time to a much more realistic scenario, attentive to real metrics, and so one can say that this change is to be welcomed as healthy.
2023, then showed even less money, more difficulties to raise, low valuations and more significant dilutions with sometimes very aggressive investor protection schemes to secure privileged positions in case of exit.
In order to attract investors, it has now become essential for companies to show their ability to be sustainable and competitive on the market, and this is where adaptation strategies come into play, carried out with two different perspective visions: in the short term, aiming to reassure investors that the change of scenario has been understood and that they are reacting quickly to secure the company, and in the medium term, defining a path that leads to break even and subsequently to growth in profitability. In the first case, action is taken on costs, starting with redundancies, in order to reduce the so-called burn rate, but risking putting the company itself in crisis if too much change is attempted too quickly. In the second, an attempt is made to develop a sustainable growth model where the real challenge is to reconcile break-even with a significant development trend, both in revenues and margins, which, however, must continue well beyond this initial goal. This is crucial because the valuation of start-ups and scale-ups is influenced by the pace of growth, growth, more than by any other parameter.
We are therefore faced with a philosophical change, no longer companies that grow thanks to continuous injections of capital and then hope to become big enough to conquer the market, but companies that, yes, leverage venture capital, but must show that they have solid fundamentals and therefore can aim, at some point, for significant cash generation. It goes without saying that this is especially true for scale-ups, but also in the case of start-ups, which by definition have no revenue as in the initial phase, this philosophical approach must be part of the entrepreneurial and corporate culture. Sooner or later the time will come for them to show these results, it is only a matter of time.
So, looking at the calendar again, in 2024 we are at the point where it has been about 3-4 years since the companies that raised at the peak of the bubble found themselves in the situation of having to refinance. On average, a round usually generated financial support for about 24 months, and entrepreneurs had to start thinking about the next round after 12-18 months. Now, even though the duration of the capital raised has been extended by the reduction of the burn rate, the knots are still bound to come to a head. If in 2021, as we have seen, capital was abundant and valuations very high, now it is exactly the opposite the market has very different expectations
Companies that have changed course and grown well, that are promising, that perhaps already have interesting metrics will continue to find investors willing to support them, albeit on different terms than before. Those who have not managed to adjust and are still burning through cash will have a harder time; some companies will close, others will have to accept extremely stringent conditions from investors. The only exception are companies that innovate in artificial intelligence, which is the current mini-bubble, the only case in which it may still make sense to talk about FOMO.
2025 is therefore the year of the test. Those that are close to break-even and can reach it during 2025 or at the latest at the beginning of 2026 will be able to move on and enter another phase of the company’s development as the break-even point is only the beginning of a path that must inevitably continue to produce growth . And here it becomes important to understand how break even was achieved. If it was done in a structured, planned and strategic manner, this will ensure that you can continue to grow; if, on the other hand, you have tried to reduce the burn rate at the last moment with dramatic cutbacks, this will risk creating companies that have saved themselves but are too weak to grow significantly and thus risk remaining in limbo. To pass the test, therefore, it will not be enough to show ideal numbers in the short term to investors, but it will be necessary to demonstrate the capacity for growth and intelligent investment management in the years to follow.
These considerations are valid for more mature companies but are also valuable for younger ones starting now. While it is true that early-stage investments follow different rules than those supporting scale-up phases, it is also true that it is very valuable for new entrants to look at what those who have come to the examination stage are doing now, because they can learn a lot from this. Understand that already in the early stages it is important to define a sustainable business dynamics, approach and philosophy that will become the company’s heritage and remain valid in future growth phases. Because the bubble has imploded and a period like the years up to 2021-2022 is unlikely to return in the short term.
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