Annual Letter 2023/2024


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Dear friends,

If we were to summarise 2023 briefly, it would be less VC investment activity. The fundamentals of startup risk did not change in 2023. What changed was a reversal of national banks printing money and lending it out at zero interest rates. Two factors in particular contributed to a slowdown in startup investments. High valuations and some business models adopted during the free money period were unsustainable. Until this is corrected, less money will flow into VC funds. This is a problem, as the VC asset class relies on follow-on investors to make the return economics stack up.

Real startups are not focused on incremental improvements but are set up to disrupt and replace established products and services. A lot can go wrong along the way. Only a tiny fraction of startups succeed and become part of the establishment. Rational startup investors know how to price the inherent risk of real startups. They diversify their portfolio of startup investments to create the foundation of one winner, making up for many failures.

Remember this. Being a VC failure means not raising the next round of VC funding and bootstrap growth. It does not mean being a company failure. A company fails when it runs out of cash to pay its expenses. All companies eventually need to balance their books with revenue from customers. Startups sell their equity to maybe one day be able to reach this point. As startup equity is the most expensive type of capital available, founders must be very judicious about spending it.

Getting from being a pre-revenue startup to a sustainable company takes a lot of grit. Please do not believe it too much when seed investors proclaim to change the world with their small investments. They mean that they have provided the seeds for one of their plants to grow into the sun. Successful founders carefully read and grittily respond to the weather to keep their companies alive.

What is the outlook for startups in 2024, then? Not much has changed the color of success, to be honest. Gritty startup founders with what it takes to sell their company to investors, employees, and customers are likelier to stay afloat. The trick is to master ‘what-ifs’ not just at a cognitive level but at the execution level. This means being on top of a lot of details. Like a chess master who can see how a perplexing number of alternative moves can lead to the next safe position. Analyzing and responding to a situation as it is. Not what it should be.

At VarsoGroup, we strive to support startups in their journey to become sustainable companies. As a fractional CFO, we provide the setup and frameworks for analyzing, planning, and executing the journey financially. We recognize that startups cannot afford an experienced CFO team full-time. We provide flexible services that range from overseeing monthly bookkeeping to raising equity and debt financing. Based on our long experience, we provide the financial transparency and causality of current financial performance and provide the ability to evaluate the many ‘do-or-die’ ‘what-if’ scenarios that all startups go through with financial insights. Based on these insights and our knowledge of best practices, we provide actionable recommendations to the founder and help to pave a multi-year path to success.

Our ideal client journey starts when a startup has EUR 2M or more in revenue and is positioned to raise a new equity round. As fractional CFOs, we assist the founder, who has to be in the lead, to improve the outcome. Another starting point is for a startup that has reached EUR 5M or more in revenue and is in an excellent position to raise a debt round. In this case, as a fractional CFO, we run a cost-effective RFP process on behalf of the founder. In between funding rounds, we complement and improve the financial operations of startups.

As far as M&A is concerned, we’re supporting the process for existing clients. We’re not looking to support new clients backed by unrealistic minority investors who must sell their stakes. A successful M&A transaction needs to satisfy two sides: a seller and a buyer. In our experience, too much time is wasted on M&A assignments where sellers are unwilling to accept that their initial investment stakes cannot be recovered. Gritty founders can hardly be faulted for accepting unsustainable valuations when offered, as equity is their most precious asset.

Long live all the gritty and financially savvy founders!