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The Smarter Startup

Insights from a VC on Today’s Startup Fundraising Market

Alejandro Lozano, Founding Principal at Newtype Ventures, shares his perspectives on navigating recent changes in the startup funding market.

I recently had the opportunity to interview Alejandro Lozano for our Startup Success podcast. Alejandro is Founding Principal at Newtype Ventures, a VC firm focused primarily on seed-stage startups, with an emphasis on underrepresented minority founders in the USA, Latin America, and Africa. Newtype Ventures officially launched in February 2022, and Alejandro and the team were celebrating their first close just a month before we sat down together, with five investments sitting in fund one at the time of our interview. He took time out of his busy schedule to share some fresh perspectives on the current fundraising market and offered some valuable advice for founders along the way.

I found Alejandro’s insights on startup valuations to be especially interesting and helpful. We’ve all watched company valuations fall throughout the year in a trickle-down effect from public markets to later-stage startups and, most recently, to mid and early-stage startups. It’s made for challenging times for startups looking to raise funds, but Alejandro pointed out some compelling reasons why lower valuations aren’t altogether bad for startups.

Higher Valuations Aren’t Always Better

Unhealthy Investor Expectations

Before the current market downturn, Alejandro saw a lot of startups raising funds at inflated valuations, often based on hype rather than data or strategy. And startups that raise on hype run the risk of attracting investors who offer high valuations but whose expectations and timelines don’t necessarily align with the company’s long-term goals or best interests. VCs are more than a source of funds for startups; they’re also a key strategic partner. Selecting the wrong investor just to get the highest valuation can push a startup in the wrong direction. It can be a wise strategic move for a startup to go with an offer based on a lower valuation if the firm making the offer is the best long-term partner for the company.

The current valuation reset presents an excellent opportunity for founders to take some emphasis off of always getting the highest valuation at any cost and re-examine their criteria for what makes the best investment partner.

It can be a wise strategic move for a startup to go with an offer based on a lower valuation if the firm making the offer is the best long-term partner for the company.

Down Rounds

Inflated valuations also put a startup at risk of a down round. After a few years of sky-high valuations, many startups now face the prospect of raising their next funding round at a lower valuation than their previous round. Alejandro also sees the prospect of more unfavorable terms like higher liquidation preferences or clawbacks, particularly for mid-stage and late-stage startups. Another ramification of the current market downturn and lower startup valuations is that tech salaries may need to come down in the short term.

While the current market conditions can be difficult for founders looking to raise capital, markets are cyclical, and in the long run, there are benefits to down cycles. A benefit of the current cycle is seeing fundraising valuations realign with the actual financial value of startups, and that’s ultimately a good thing for both founders and investors.

A benefit of the current cycle is seeing fundraising valuations realign with the actual financial value of startups, and that’s ultimately a good thing for both founders and investors.

Alejandro’s Advice for Founders

Toward the end of our interview, I asked Alejandro what advice he has for startup founders right now. He shared two very valuable bits of advice.

1. Pay Attention to the Questions Investors are Asking

Alejandro advises founders to pay attention to the questions investors ask during presentations. Have they looked through your deck already or not? Do they want you to walk through the deck, or are they coming to the meeting prepared and ready to dive deep into thoughtful questions?

Understanding where investors are coming from will allow everyone to make the best use of time. And, if you pay attention to the questions being asked, you can start to understand which VC would be the best partner for your startup.

“If you pay attention to the questions being asked as a founder, you can start sussing out if this would be a VC worth partnering with.”
— Alejandro Lozano

2. Treat Investor Feedback as Data Points

During fundraising, startups will typically meet with many investors, some of whom understand the startup’s strategy and vision better than others. Alejandro believes that, at the end of the day, founders know best. He advises founders to treat feedback from investors as multiple data points to triangulate down to an actionable item that makes sense for them and their company.

“…treat feedback from investors as multiple data points to triangulate down to an actionable item that makes sense for you.”
— Alejandro Lozano

I appreciate the time Alejandro shared with me and the great advice he offered our listeners. Newtype Ventures is off to an impressive start, and I’m looking forward to seeing what the future holds for this exciting new VC firm. Listen to our entire conversation here.

 

This discussion with Alejandro Lozano comes from our show Startup Success. Browse all Burkland podcasts and subscribe to the show on Apple podcasts. Find Alejandro on LinkedIn and visit newtypeventures.com.