Liz Giorgi anticipated raising a larger sum for her startup, Soona, in April. However, after noticing the influx of capital in the startup arena, she opted to accelerate her fundraising efforts. In October, Giorgi began discussions with venture capitalists, six months earlier than planned, while her company still had enough funding to operate for another year.
By the beginning of the new year, Giorgi successfully secured $35 million, adding to the previous $18 million raised by Soona. This funding is expected to sustain the company for an additional two years as they focus on developing a sales strategy and expanding product offerings. Giorgi mentioned that with a more conservative spending approach, their financial resources could potentially last two-and-a-half to three years. This financial cushion is crucial for Soona to grow before needing to seek more funds, especially if the market conditions change. “Every founder is grappling with this question: Can the current market trends continue?” she reflects.
In recent years, investor enthusiasm has significantly supported the startup ecosystem, with valuations and funding rounds reaching unprecedented levels. Many founders have capitalized on the situation by securing substantial investments that prolong their startups’ lifespans.
Kruze Consulting, an accounting firm working with over 600 venture-backed startups, reports that its clients now average $5.42 million in cash reserves, compared to $3.27 million in 2018. While the cash is more abundant, startups are also becoming more frugal; clients expect their cash to last an average of 26 months—more than double the 12-month average seen in 2018, despite only a modest increase in cash flow.
Historically, large investment rounds allowed founders to indulge in luxury office spaces, extravagant events, or elaborate marketing campaigns. Nowadays, startups are adopting a more budget-conscious approach. “We are exercising caution regarding our burn rate,” stated Alexandra Moser, COO of Clockwise, a startup that optimized calendar use and raised $45 million in January. While the pandemic spurred growth in this sector, Moser’s team is wary of how long such favorable conditions might persist, leading them to cut unnecessary costs, such as promotional merchandise.
Some startups have even eliminated larger costs altogether, like office spaces. Jones notes that prior to the pandemic, his clients typically spent around $45,000 quarterly on rent. Now, over half of them no longer incur this expense, resulting in slower cash burn and allowing for greater investments in essential business areas.
However, certain costs remain unavoidable, particularly staffing. Labor is the largest expense for early-stage companies, and hiring has become significantly more costly. Startups are now paying, on average, 20 percent more for tech talent than just a year ago. “The job market is extremely competitive,” remarked Eric Tarczynski of Contrary Capital. His portfolio companies are investing notably more in recruitment than they did previously due to fierce competition for top-tier candidates.
“The pay for software engineers continues to escalate rapidly,” commented Matt Soule, founder of Parallel Systems, which develops self-driving battery-powered rail systems. With $50 million raised in January, a hefty portion will go towards expanding their engineering team. In this competitive environment, mid-career engineers can command salaries exceeding $200,000, while experienced engineers may earn upwards of $400,000 in salary alone, alongside substantial equity—often totaling over $1 million in compensation. “Navigating what constitutes a competitive salary is increasingly challenging given the fierce competition,” Soule added.