As a VC at Financial Venture Studio, a pre-seed and seed stage fintech venture fund, a significant proportion of startups that I see occur at the “idea stage”. Founders approach our fund to raise capital on a concept, in some cases coming armed with initial validation data or an early team. At this stage, the product is typically not yet finished and the company is not in the market. Because they are so early and so nimble, these founders are able to very quickly adapt to changing market or macro conditions.
As the stock market has declined and venture funding has become scarcer over the last few months, I've seen a wholesale change in the composition of potential investments: idea stage pitching has dramatically declined, and a much higher proportion of companies have come to our fund with demonstrated traction and real revenues. I believe this change in pipeline composition is understandable for early entrepreneurs navigating market uncertainty, VC statements about pausing deployments, and a retreat from risk across markets. However, based on my experience working with small businesses and startups, I’m expecting new entrepreneurs at the idea stage to come roaring back in the next few months - and I’m excited to see what sort of innovations emerge as first-time founders get into the game.
I first noticed this trend in my role as Co-Founder & CEO of Azlo - a digital banking platform for small businesses. At Azlo, roughly 80% of our customers were businesses that had been started in the prior two years- and the majority of them were entirely new businesses. In March 2020, we saw almost a complete pause in new companies. Entrepreneurs were trying to understand the macro conditions and had stopped launching new companies. Then, just a few weeks later, we saw a tidal wave of new accounts that sustained for months. As people left the workforce (voluntarily or involuntarily) they turned to entrepreneurship as their next career move. We dug into why, and discovered the overwhelming majority (96%) stated that it was because they had always wanted to start a business, and suddenly they had the time, money, or excuse to do so.
This is reflected in the macro data. Data from the Kauffman Foundation shows that after every major recession in recent years, the rate at which companies were started has increased. Based on my experience at Azlo, I believe this is in part pragmatic - when the job market cools you turn towards opportunities in front of you. But from our user research, I’ve also come to understand that these changes cut through the inertia of employment, and open up the possibility of something new.
Source: https://indicators.kauffman.org/indicator/rate-of-new-entrepreneurs/. Note that the post-COVID spike in 2020 caused the highest spike in new entrepreneurship on record with the data.
At a micro level, we saw a similar spike during this time frame for new startups. During the first few months of Covid - March through May of 2020 - we saw the market come to a near standstill. However, by October of 2020, the number of companies we saw had nearly 20X-ed from an April nadir and was our second-highest month ever for potential investments.
The recent layoffs in tech are unfortunate, and I know how gutting these experiences can be for employees. However, I’ve always chosen to operate with the mantra “within challenge lies opportunity”. This time around, I foresee a whole new class of aspiring entrepreneurs seizing the moment to pursue their deep-seated passions and start a business. It’s an exciting and scary thing to jump into, but companies born during recessions are often more disciplined and resilient than other vintages. At FVS, we’re always open to talking with founders that have thought deeply about their problem space, and who have a clear passion for taking on big challenges. So, I’m buckling up for a busy summer and fall, and predicting a surge of new “idea stage” business coming to our door. And I, for one, can’t wait to see what emerges.
Cameron Peake is a partner at Financial Venture Studio, an early-stage fintech fund that provides capital and deep sector expertise to help startup founders get to market quickly, grow rapidly, and build an enduring market presence.