The state of venture capital (VC) funding in the US has seldom been in such dire straits. Feeling the pressure of the economic downturn, investors have been quick to tighten their purse strings. With the competition for funding consequently reaching a crescendo, startups looking to secure VC funding have been desperately searching for a unique differentiator. 1840 & Company, a global outsourcing and staff augmentation provider with extensive experience in the VC landscape, leverages modern outsourcing solutions to help these young businesses balance their ledgers in a way that appeals to investors.
“Our business process outsourcing & staff augmentation solutions allow startups to prioritize on what matters the most for investors – revenue and profitability,” says Bryan DiGiorgio, CEO of 1840 & Company.
An enduring trough in VC funding
Soaring inflation and interest rates, coupled with a banking crisis in Silicon Valley in March, have conspired to deliver a grievous blow to the VC funding environment.
The first half of 2023 witnessed a 35% drop in in deal volume and a 49% dip in deal value compared to the previous year. Nearly 11% of VC deals have been down rounds — the highest rate since 2020. The average number of investors per round has plummeted as well, from a record high 5.84 per deal to a decade-low of 3.53.
There is no good cause for optimism in the near future either. For instance, the prediction that as many as 50% of seed-stage may be at risk of shutting down in the coming 12 to 18 months is casting a shadow over investors. That startups raised “only” $29.4 billion in Q2 2023, a sharp decline from the $44.4 billion raised in Q1, further adds to the doom and gloom.
Living in an investor’s world
Despite these disheartening figures, it would be inaccurate to suggest that investors have run out of funds. On the contrary, they are quite eager to partner with startups that can demonstrate resilience in this period of economic turbulence. According to investors, if these businesses can survive the current climate, they will certainly thrive when the economy regains stability.
For startups looking for their next round of early or growth-stage funding, however, the bar has never been set higher. Unlike in 2021 when investors doled out money left and right, businesses should now strive to meet the Rule of 40 and maintain a burn multiple of less than two to optimize their prospects in funding evaluations.
These conditions are not easy to satisfy. From 2011 to 2021, only 16% of software companies managed to surpass the benchmark where the combined revenue growth rate and profit margin exceeded 40%. Q2 2023 saw a flurry of layoffs among VC-backed tech companies as they raced to lower their burn multiple below two.
In this increasingly competitive ecosystem characterized by heightened financial prudence, only the most profitable and least risky companies stand to secure VC funding.
Global outsourcing and staff augmentation to the rescue
Business process outsourcing (BPO) and staff augmentation are two distinct but complimentary models that allow startups to delegate critical, non-core operations. BPO typically involves handing over entire processes or functions like financial bookkeeping or marketing strategies to a specialized third-party provider. Staff augmentation, on the other hand, focuses on temporarily enhancing existing teams with specialized talent, offering more agility in scaling up or down in response to market conditions. Both methods can seamlessly integrate into a startup’s operational framework, helping them avoid the administrative and financial burdens of traditional hiring.
Utilizing both is advantageous for multiple reasons:
- Financial Efficiency: Both BPO and staff augmentation negate the need for hefty capital investments in HR, infrastructure, and training. This financial leeway is particularly attractive to venture capitalists looking for startups that can scale efficiently.
- Operational Focus: Startups often lack the resources to manage non-core functions effectively. While BPO provides an outsourced department to handle these, staff augmentation can fill specific expertise gaps without losing control over the processes. Either way, startups can focus on their core competencies.
- Global Talent Pool: Staff augmentation allows startups to source expertise from around the world for short-term needs, fostering a diverse and highly skilled team. BPO extends this benefit by offering a whole department of experts based globally.
Financial Impacts:
- Cost Reduction: Like BPO, staff augmentation can be sourced from lower-cost regions, significantly reducing labor and overhead costs. This can result in lower Operating Expenses (OPEX) and a higher Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
- Cash Flow Optimization: Staff augmentation can be specifically employed to manage accounts payable functions or other financial tasks, enhancing cash flow and extending a startup’s runway.
- Enhanced Margins: By selectively augmenting staff in areas like production or supply chain management, startups can also achieve lower Costs of Goods Sold (COGS), thereby improving gross margins.
- Customer Satisfaction: Companies can augment their existing customer support teams during peak times, ensuring high levels of service, which in turn increases Customer Lifetime Value (CLV).
By leveraging both business process outsourcing and staff augmentation, startups can fine-tune their operations and financial metrics, making them highly appealing to venture capitalists. “Financial prudence is more critical than ever in 2023 and most likely into 2024,” says DiGiorgio. “Venture capitalists are increasingly looking for emerging enterprises that offer great metrics and valuations.”
The future of work is global
As startups continue to navigate an increasingly complex and volatile business landscape, the role of BPO and staff augmentation is poised for unprecedented growth. These models provide the dexterity and operational efficiency that startups need to adapt to market fluctuations, pivot business strategies, and scale with agility—all without incurring prohibitive costs or lengthy hiring commitments. With VC investors placing an even greater emphasis on sustainable growth and strong financial metrics, it’s evident that startups employing business process outsourcing and staff augmentation strategies are well-positioned to attract funding.
“Although 90% of startups fail, those that successfully integrate outsourcing strategies into their business operations can triple their chance of survival,” says DiGiorgio.
