Jul 13, 2023
Founders of startups aren't the only ones adjusting to a tight funding environment. Investors such as Dan Roselli, co-founder of Charlotte-based accelerator RevTech Labs, are having to be more prudent when it comes to finding high-quality investment opportunities.
Founders of startups aren't the only ones adjusting to a tight funding environment. Investors such as Dan Roselli, co-founder of Charlotte-based accelerator RevTech Labs, are having to be more prudent when it comes to finding high-quality investment opportunities. That stems from challenges venture capital firms often face, such as limited deal flow, competition for deals and limited exit options.
Roselli said his organization is dealing with lenders wanting to hold off on investing in its fund to see how the economy plays out. Last year, RevTech Labs launched a second capital fund for financial-technology and insurance-tech companies. It has so far raised $11 million of a $50 million goal.
The good thing is, he believes broad economic challenges — such as a potential recession and rising interest rates — are in the rearview mirror. His fund, though, is continuing to delay decisions on what companies to invest in as the economy softens. "We were delaying decisions to see what the weather was going to be like, and the weather's looking sunnier in the back half of the year," he said. "So, I'm cautiously optimistic."
Roselli recently spoke with the Charlotte Business Journal about challenges he's faced discovering what startups to invest in, impacts of the tough VC industry for its capital fund and offered key advice to help local startups survive. His answers have been edited for brevity and clarity.
What challenges have you faced when it comes to deciding where to place money? Charlotte in general is very good at the large funding at the banks and private equity firms that we have. When you're talking about writing $100 million check out of a $2 billion fund, Charlotte knows how to do that really well. The venture world, where you're writing $500,000 checks or a $1 million check, is less quantitative. There's a more qualitative component to it. So, I think it's always hard. How we deal with that at RevTech Labs is the accelerator — by bringing companies in and giving them a little bit of money but also working with them through the program. We really get to know the founders through the course of running the accelerator. And we think that makes us better investors after the fact. And so that's how we tackle that problem — where there's a lot of qualitative to go with the quantitative. But early-stage investing is hard.
Has it been a challenge for RevTech Labs to raise funding for its second capital fund of $50 million, launched last year? I would say, in general, the fundraising environment is softer. With SVB and the banking crisis, a lot of community banks are potential investors for us. And a lot of banks are saying, "We really like what you're doing; come back and talk to us in the fourth quarter." I think we're getting some of the same reaction, which is, "Hey, love what you're doing, and come back to me in 90 days."
What do you typically look for when considering backing a company? In general, especially at this stage, it's always the team as the No. 1 thing. And if you look at the economic changes in the last 12 months, the founders that are more likely to survive are the ones that react quicker. They're the ones that lower their burn rate faster. They're the ones that go out and get that bridge round faster. They're the ones that focus their business model on things that will generate revenue. That's the other way you can change your burn rate, is to try and get some more revenue. And so founders are the first thing we will always look at. This is no different in tough economic and fundraising times. The second thing we'll look at is marketplace proof points or product-market fit. Have people — that's not us or not them, they’re a third party — have they bought this and do they think it's solving a pain point, and they're willing to pay them to solve the pain point.
What advice do you have for local startups experiencing trouble with raising capital? One is you try and cut your burn rate. So, burn rate is how much money you're spending — expenses minus revenue each month. And normally startups are burning money. They're not making money. So, that's not atypical, but you lower your burn rate. You can do that in a bunch of ways. One is delaying development or delaying things you're going to spend money on. And another way is to actually cut costs or cut staff. And I've seen both of those things happen. The goal when funding is tight, and the goal of every startup, is first and foremost survival. Because if you can survive, then you have the prospect of success in the future. But if you get to the point where you have to wave the white flag and close the doors and go take a job, then the probability is zero. So, as long as the doors haven't shuttered, there's still some probability of success in the future. But survival is really the first thing that all the founders look for, and they do that primarily by lowering their burn rate.
The second thing they do is they'll try and do smaller financing. Sometimes they'll call that a bridge round — meaning a little bit of money to bridge them from where they are now to when the fundraising marketplace gets better. And a lot of times they'll do that with current investors, because current investors already know the team, already believe in the team.
And the last thing I would say is there are what I would call growth rounds, kind of typical rounds that are happening. They're just fewer, and they're being reserved for the companies that are really showing great progress and great traction in the marketplace. Across every level of venture, there's a flight to quality. And in the early-stage venture community that means traction. And so the rounds that are happening are kind of reserved for that flight to quality in the very top companies.