Capital-hungry startups won’t escape the global capital shortage, says Jim Dowling, the Irish founder and CEO of Stockholm-based AI firm Hopsworks.
The pressure comes from a weakening global economy, the war in Ukraine, rising inflation and the rising interest rate environment.
Dowling described the current funding environment with a phrase famously used by former Manchester United manager Alex Ferguson to describe a nerve-wracking end to a tightly balanced game.
“It’s time for many startups to watch the market closely and hope for the right outcome,” Dowling said Irish Independent.
The businessman, who hails from Lucan in Dublin but lives in Stockholm, previously worked in the distributed systems group at Trinity College Dublin, home to a number of successful Irish technology companies – including Iona Technologies and Demonware.
Founded in 2016, Hopsworks has grown from 11 employees to over 40 employees. Clients include Paddy Power-Betfair, American First Credit Union (AFCU) and Human (a Goldman Sachs AI Cybersecurity subsidiary). Hopsworks technology has also been used by music streaming giant Spotify.
In July last year, Hopsworks raised €5 million from backers Industrifonden and Inventure to expand its commercial operations, particularly in the US. This was followed by a €1.5 million seed funding round in 2018, which also included Dublin-based Frontline Ventures.
Dowling is aware of the shifting financial sands. His company will launch a new investor roadshow in early September and has to raise its next round of funding by the first half of next year. He thinks terms vary depending on what is being sought.
The whole point of VC-backed companies is that you should always grow
“The market for later-stage companies looking for $50 million to $100 million is really tough, but it’s not that bad for companies like us — because we’re not looking for that kind of money,” he says. “Anything up to $20 million – there’s still some money there, but not on as favorable terms as it used to be.”
According to KPMG’s Venture Pulse report, Irish VC investment almost halved in the second quarter of this year as the tightening interest rate environment and economic uncertainty led to a slowdown in deals. Irish companies raised $207 million in the second quarter, compared to $401 million in the first three months of this year – and $641.5 million in the first quarter of 2021.
High-profile companies like payments firm Stripe and Swedish fintech Klarna have seen their valuations fall this year (down 30 and 80 percent, respectively). Companies are responding by shedding jobs and curbing spending.
Dowling says companies are trying to avoid down rounds at all costs — even if they desperately need money now. In a down round, a company raises new money at a valuation below previous rounds of funding.
“A down round is a disaster because the whole point of venture capital-backed companies is that you always grow – and if you don’t, whoever invested in the previous round is dead. And that doesn’t look good,” he says.
Dowling says many founders are having to rethink their strategies, with some startups looking to partner with those they think will win in their sectors.
We need to tighten our belts and that is the reality for many people
“We believe that we can be one of the players who can survive this wave of consolidation,” he says. “That’s our challenge: get enough customers and revenue so we’re big enough to end up being a player.”
Hopsworks is focused on delivering AI infrastructure, which requires greater risk-taking from investors.
“Companies like ours may have a longer life cycle before they become profitable — but they become effective monopolies or duopolies and become very lucrative over the long term,” says Dowling. “It requires a risk-taking attitude that many European investors don’t have, while Americans are more willing to pour huge sums into such companies.”
Hopsworks recently participated in the EU-funded DealFlow – a way to help European companies that have achieved deep-tech breakthroughs in research find European investors.
“We’ve made five good contacts from that, and hopefully that will lead to new investments,” says Dowling.
The changed funding situation has already prompted Dublin-based TerminusDB, a deep-tech spinout from Trinity College, to change course. The company had hoped to raise funds this year but has now delayed its growth plans due to difficult market conditions.
“We’ll take a breather in the spring and see what the macro situation looks like,” says Luke Feeney, who co-founded the company in 2019.
For startups, delaying funding means delaying growth
TerminusDB began building the information architecture for “Seshat: Global Historical Databank” – a highly ambitious project to store much information about every society in human history and make it available in a machine-readable format so that analysts could make predictions based on the data .
The founders decided to provide an open-source data management platform for large and complex data that “gives data semantic meaning so computers can effectively interpret the data.”
Customers now include a number of banks and Irish food wholesale group Musgrave Group.
When TerminusDB spun off in 2018, it raised €1.2 million in seed funding from Atlantic Bridge with support from Enterprise Ireland.
Another €3.6 million was raised in May 2021 by Belgium-based Volta Ventures with the participation of Seattle-based Acequia Capital, which is led by a number of former Microsoft executives. Atlantic Bridge and Enterprise Ireland also attended.
“The advice we’re getting from our VCs now is that the conditions are a lot harder and it’s a lot harder to raise capital,” says Feeney, a former diplomat who was briefly Ireland’s ambassador to Greece.
For startups, delaying funding means delaying growth — because most early-stage companies rely on external capital, not margin, to expand.
TerminusDB had planned to double its workforce to 20, but Feeney says Covid has prompted the founders to scale back their ambitions by closing their R&D operations in the Netherlands.
With no new funding on the horizon at this time, TerminusDB is cutting costs, allowing them to extend their funding round by an additional 12 to 18 months.
“We need to tighten our belts, and that’s the reality for a lot of people,” he says. “There are projects that we would like to get involved in, but we are holding back on these and spending less on external consulting and reducing spending on software and Google Ads.”
Tech founders are gearing up for a harsh winter and increasing consolidation across industries.
“There’s a lot of abundance in the industry, but not so much in our early phase,” says Feeney. “We are small enough to be like the mammals during the dinosaur extinction period – we can be the ones who persevere and grow into elephants after the dinosaurs are wiped out by the asteroid impact.”
He also looks to the more recent experience of the dot-com bust, when many capital-hungry startups failed as funding dried up—only to be followed by a tech boom as the internet exploded.
https://www.independent.ie/business/squeaky-bum-time-for-all-startups-as-investment-funds-tighten-their-wallets-41919335.html “Hum time” for all startups, as investment funds make their wallets tighter