Forward's Growth Pulse Q1 2021

Welcome to Forward’s inaugural Growth Pulse report. Twice a year, we’ll be sharing our insights on the current state of VC, its impact on early-stage startup growth and what this means for startups within the UK ecosystem. We’ve surveyed 600 pre-money startup founders to ascertain, away from the headlines of the last 12 months, what the current economic outlook practically means inside their early-stage business.

As the funding landscape changed quickly during 2022, startup founders and their teams were forced to reframe the way they thought about growth. As reducing costs and preserving cash became the number one priority, the growth plans of startups at all stages were impacted, from strategies and budgets to channels and talent. Forward has been privy to many conversations with founders and growth leads both within and outside of our portfolio. Doing more with less and achieving sustainable growth was, and still is, the main priority for growth leaders.

In this report, we’ll cover:

• A high-level overview of the world of VC in 2022 to now.
• Sector-specific investment trends across SaaS, AI, eCommerce and Web3 startups
• How startups have adapted their strategies to focus on sustainable growth.
• What does the growth outlook look like for these startups?
• What are their challenges and where are the biggest opportunities?

2022- what was happening in the world of VC?

Investment headlines.

• Following a record-breaking year in 2021, UK venture investment started strongly in 2022 but in July, the market started to cool.
• Despite the downturn, UK startups raised $30B - the second biggest year on record, and a drop of 31% on 2021.
• Investor caution and valuation dynamics led to fewer, slower rounds at lower valuations. Macroeconomic headwinds impacted investor confidence, and those effects trickle down from public markets to private companies, affecting valuations and making rounds slower to complete.
• Public and later-stage tech were the hardest hit, but private company valuations across the globe were impacted by these pressures, including early-stage startups.

In practice, what this meant for Forward (and many other VCs) was deploying capital into our existing portfolio, to help them extend their runways whilst they reduced their cash burn, and streamlined efficiencies to withstand the months ahead.

For pre-money founders, this meant possibly delaying their first raise, perhaps bootstrapping for a little longer or trying to raise from friends and family. For founders at the Seed or Series A stage, it meant an unexpected delay between their rounds and doing more with the investment they had already received, unable to turn to later-stage investors for the next step in their journey. In both instances, preserving cash was critical.

Although funding slowed, it didn’t stop entirely.

Overall, investment in Forward’s areas of interest, (SaaS, Marketplaces and AI) decreased by 30% compared with the outlier year, 2021, but saw an 80% increase compared to 2020.

‍

Investment into SaaS startups within the UK, actually slightly increased by 2% according to Dealroom data. Forward invested in 3 news companies in 2022, which are all B2B SaaS models across different industries. Whilst growing a SaaS startup is undoubtedly challenging, this model lends itself well to sustainable growth channels without relying too heavily on expensive marketing channels, but more on that later in the report.

The Web3 sector bucked the trend.

Last year, Forward announced that we were to begin exploring Web3 as a new investment area, particularly when applied to business models and sectors we know well. According to Dealroom data, there was in fact a 14% increase in investment in Web3 companies in 2022 compared to 2021. Up more than 500% on 2020’s total.

Whilst this sector is in its infancy, the technology is maturing and investors are taking notice. We see within our own deal flow that entrepreneurs are starting to solve real-life problems with innovative use of Blockchain technology and we look forward to monitoring this advancement over the coming months.

Startups activate resilience mode.

Cost cutting begins.

As funding rounds took longer than in previous years, startups were under more pressure to boost efficiencies, preserve cash and grow sustainably. Unsurprisingly, the prospect of rounds taking much longer to close jumpstarted a mass cost-cutting drive throughout the startup ecosystem.

According to OpenView Partners’ 2022 SAAS Benchmarks Report, the reduction in cash burn wasn’t as closely linked to the remaining runway as initially anticipated. According to their data,  companies with less than 6 months’ runway were reducing cash burn by 26% which was the same as companies with 25 months + of runway.

‍

Our advice to our portfolio at this time was to double down on the fundamentals. Agility and financial strength were key. Founders needed to weather the storm, focus on sustainable and impactful growth, as well as preparing to accelerate when the economy turned. This meant executing strategies focused almost exclusively on revenue generation and cash preservation. Marketing and sales leaders were challenged to strip back on their growth-at-all-costs mentality. Acquisition costs were being scrutinised, and return on advertising spend was now crucial. Channels that weren’t working hard enough needed to be cut. It was time to focus on what worked and worked well.

What did this mean for growth? 

Marketing and Sales leaders set their new course. 

In the latter stages of 2022, commercial leaders had to take action. According to Segment’s 2022 Growth Report:

• 61% of respondents stated that the growth-at-all-costs mentality is over.
• 62% of respondents stated that their business has increased its focus on profitability over the last 12 months.
• 69% of businesses say that they are leaning into channels with proven ROI.

Despite startups preparing to preserve cash, in the wider business world, Gartner reported that overall marketing budgets had increased generally above levels seen in 2021, but have not yet recovered to pre-pandemic spending. Although we anticipate that the data within early-stage startups may not follow this trend exactly, our opinion is that marketing budgets are still available within early-stage businesses but are to be spent on revenue-generating strategies.

Early-stage startups still prioritise marketing.

According to our research, marketing is considered the primary customer acquisition channel (42%), with clear opportunities to develop sales and product-led acquisition strategies in parallel to marketing activity.

42% of early-stage founders spend 10% or less on marketing activity.

According to Gartner’s Marketing Budget Report, CMO’s reported that in 2022 their marketing budgets we 9.5% of their company’s overall revenue. Whilst early-stage startups have low revenues (and sometimes none at all), our research shows that 42% of founders are spending less than 10% of their overall operations budget on marketing, with an encouraging 30% spending between 10%-25%. 

Balancing budget, channels and skills are top of the agenda.

Founders are managing a variety of conflicting challenges, mainly doing more with less and finding the right skills to help them achieve their growth goals. Out of a list of 15 challenges, our respondents ranked the following as their most pressing:

1. Budget
2. Choosing the right marketing channels
3. Paid advertising
4. Managing customer acquisition costs
5. Hiring the right talent

Through our community of marketing leaders from Forward’s portfolio, many commented on how smaller marketing budgets meant they were cutting paid advertising spend, particularly top-of-funnel awareness initiatives. For many early-stage startups, paid traffic often props up website traffic stats, follower audience growth and general views on content, whilst they toil away at replacement organic strategies, which take longer to become effective.

Our data also showed that early-stage startups are using a range of marketing expertise within their businesses despite a clear change in channel strategy: 

• 56% stated their marketing activity was founder-led
• 19% stated they have an internal team of specialists
• 9% stated using freelancers 
• 6% stated using marketing generalists 
• 6% stated they frequently use agencies

🔥 Forward’s hot take 1: Find cheap ways to bring specialist skills into your startup.
With significant budget pressures hiring a full-time marketing specialist or working with an expensive agency is not the most cost-effective way to find the blend of growth channels that work for you. Specialist freelancers can be a great (and cheaper) way to bring in specialist skills when you need them. At Forward, we regularly use Yuno Juno, for example, to find great creatives and experts as and when we need them. 

Customer retention wins over acquisition.

Anecdotally, marketing leaders within our portfolio identified low-cost optimisation opportunities further down their sales funnel. Metrics such as Customer Lifetime Value and retention rates are now front and centre. Driving acquisition costs down and gaining more value from each customer is key, as they navigate the next 6-12 months.

Depending on what sector you’re in, or what report you read, acquiring a new customer can cost between 5 to 25 times more than retaining an existing customer. According to Bain & Company, improving retention by just 5% can drive profits up over 25%We see this as a period of transition and opportunity: our marketers are building integrated, collaborative and lean growth machines for their companies. As the markets open up, they will be very well placed to pivot to fast growth, utilising capital efficiently.

🔥 Forward's hot take #2: Focus on retention.
‍Early-stage startups often fight tooth and nail customer by customer. Those first customer wins often involve every member of the team. When you’ve fought so hard to secure that deal, thinking about how you can retain and grow that customer is critical to save money on acquisition costs. Often the founding customers have a direct relationship with the founders, but as you scale, what can you put in place to ensure that they are well looked after and remind a customer of your business?

Founders deprioritise paid for more sustainable channels.

As well as focusing on customer retention and lifetime value, founders and marketers are exploring cost-effective acquisition channels for their early-stage startups. When asked which channels they will now be focussing on, our respondents ranked the following channels 1-4 out of 13 total channels:

1. Organic social media
2. SEO (organic traffic)
3. Partnerships
4. Product lead growth

Conversely, paid advertising channels, including Facebook, Instagram, Google/ Bing PPC and TikTok were ranked 9-14. It’s clear that early-stage startup teams are favouring sustainable and cheaper channels to acquire their first customers, as they simply don’t have the budget to waste on effective digital advertising.

Through our community of marketing leaders from Forward’s portfolio, many commented on how smaller marketing budgets meant they were cutting paid advertising spend, particularly top-of-funnel awareness initiatives. For many early-stage startups, paid traffic often props up website traffic stats, follower audience growth and general views on content, whilst they toil away at replacement organic strategies, which take longer to become effective. 

🔥 Forward’s hot take #3: Build an owned audience.
‍Pre-money startups are at a disadvantage with lower budgets and fewer funding options available to them. Rather than spending a significant amount of time on testing growth channels, they should double down on inexpensive channels that can generate sustainable growth, reducing their reliance on paid channels until they have more favourable budgets. Our advice is to focus less on “renting” their audience (via paid advertising) and grow their own, through organic website traffic, social media audiences and engaged newsletter subscribers.

Looking ahead.

To achieve success with organic channels and brand, skills and experience matter.

With these new budget pressures and a laser focus on revenue-generating growth, founders and their teams are switching their strategies, tactics and channels to win and retain customers. As they double down, the question becomes do early-stage founders have the right expertise in their team to effectively execute their new plans?

Despite 42% of respondents stating that marketing was their primary customer acquisition channel, our findings show that there is a significant marketing skills gap in pre-money startups.

• 55% of founders stated that their marketing founder-led. Of this cohort:
• 42% have only 2 years of marketing experience
• 58% are a marketing team of one person
• 46% selected trial and error as their main source of learning

On the other hand, 19% stated that their marketing team was made up of an internal team of specialists. Of this cohort:

• 65% had 2-5 team members
• 46% had 10 years + experience

It’s clear from our data that pre-money, early-stage startups are dramatically underutilising specialist skill sets within their teams, and opting to learn-as-they-go rather than invest in economical alternatives like specialist freelancers to help them navigate the path to sustainable growth. We believe that those founders who seek the expertise and skills they need will be the ones who win over the next 12 months.

‍