Keeping a Growth Mindset: PE Saving Good Businesses With Distressed Venture

Every stakeholder in a startup wants to see it take off like a rocket. When that doesn’t happen, the company may find it hard to obtain follow-on funding. That’s unfortunate since many businesses that investors walk away from because they aren’t hitting growth targets can ultimately deliver excellent returns.

This is where distressed venture comes in. While it’s not as commonly used or as well known as other funding strategies, it’s been around for decades.

Progressing Toward Profitability With the Help of Distressed Venture

As the economy today experiences a downturn, opportunities for distressed venture investing are increasing. The challenge is convincing LPs to see the potential in slumping startups. They realize it’s a longer path to profitability, likely with lower returns—at least initially.

But investors are increasingly discovering that if a company has a fundamentally sound business model and is generating revenue, it’s worth a look. There’s no reason a business like that can’t achieve sustainable profitability and enable founders and inventors to make a lucrative exit. It just takes a little longer.

And with looming cash shortages, fewer startups will be receiving additional funding. That can leave them essentially adrift without investor guidance. But they can get back on the path to success with the help of patient, forward-looking funding partners.

Conditions Driving a Shift to Distressed Venture

The potential for down-the-road profitability is one reason more investors are considering distressed venture. But the shift from viewing slow-growing startups as entities to be avoided to attractive opportunities is also being driven by market changes.

What had been an inflated VC environment isn’t just normalizing—in many areas, it’s crashing. That comes as no surprise to people who’ve been watching for the signs. Some of them became apparent several months ago, causing VC firms to reassess their chances for advantageous IPO exits. Many are responding to market conditions by slowing their activity to ensure they don’t have too many commitments that don’t promise successful near-term exits.

The upside to the current conditions is that savvy investors can find tremendous deals. As the growth market withers, a struggling late-term company that’s spending money faster than it can make it often will agree to lower-but-fair funding terms in order to avoid a financial crisis. 

Distressed Venture: Risks and Rewards

There’s significant risk in a distressed venture approach, of course. But there’s risk in all types of investing, so dismissing distressed venture as an option may not be wise in our current economic climate.

The keys to success in distressed venture are being clear in your objectives and methodical in your research. That requires both the right processes and the right technology. But with those in place, there’s every reason to believe a distressed venture investment can deliver a respectable return. And firms that develop expertise in this area can stay active regardless of market shifts.

The Altvia platform has tools that enable firms to look at and engage with startups and other companies efficiently and effectively. Contact us today to request an informative demo.

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