What VCs Are Looking for in New Creator Economy Startups: Advice

• Like many companies, creator startups are facing headwinds as they enter the second half of 2022.
• Venture capital firms funding these companies are look to mitigate risk during an economic downturn.
• Insider asked VCs what they look for in new startups and what they’re telling current portfolio companies.

The creator economy has boomed in the past few years, propelled in part by hundreds of millions in funding from angel investors amd venture capital firms.

But some investors are tightening their belts in the face of a broader economic downturn that has seen many companies cut back, either through layoffs or slowed headcount growth.

Funding for creator startups is still flowing, but often in smaller sums and with a more targeted purpose, VCs told Insider.

“Capital efficiency is more important than ever now because you have fundraising risk,” said Josh Constine, a venture partner at the firm SignalFire, which has invested in startups like Karat and Truffle.vip.

But it’s not all bad: As funding becomes more scarce, deals are tilting in favor of investors. 

“This is the first time that dynamic has shifted in the last four years,” Ben Mathews, a general partner at Night Ventures, told Insider. “It’s really been a much better time to be a founder than it was to be a VC.”

Faraz Fatemi, a partner at Lightspeed Venture Partners, which raised another $7 billion across four funds in July, told Insider concerns over a possible recession haven’t affected their investing. 

For one thing, valuations are becoming more realistic, requiring founders to pitch realistic business plans when they fundraise. 

“Last year, you could raise a Series A and raise 20 million bucks, and take that $20 million and figure things out and do a bunch of experimentation,” said Saaya Nath, vice president at venture firm Jump Capital, which she said hasn’t paused investments and is continuing to look for good deals. “We’re definitely seeing more founders come to the table with a prepared plan of action.” 

Marlon Nichols, a cofounder and managing general partner at MaC Venture Capital, said he remains bullish on creator startups. MaC has invested in a variety of creator companies, including esports org FaZe Clan, virtual influencer upstart Brud, avatar companies Genies, and creator production studio Brat TV.

“We’ve made several creator-economy specific investments just this year alone,” he said. “You can’t put the genie back in the bottle. Instagram and TikTok stars exist. Some of them have made a lot of money. Some have built amazing brands. I don’t think that’s going to stop. There’s a hunger for it.”

Insider spoke to investors at VC firms to understand what they’re looking for in creator economy upstarts, and how they’re advising their existing portfolio companies in tough times. Here’s what they told us.

Doubling down on tools to help creators

For some VCs who invest in the creator space, the focus now is on companies building practical tools that help influencers expand their businesses. 

Jump Capital’s Nath is eyeing three categories of tools in particular: fintech, CRM solutions, and traditional business tools. 

“I’m excited about platforms that have cracked the challenge of distribution and monetization,” Zhenni Liu, a partner at MaC Venture Capital, told Insider.  

Behind Genius Ventures founding partner Paige Finn Doherty agreed, telling Insider that the company will continue to “double down” on upstarts that make “creator tools.” The firm has previously invested in link-in-bio upstart Beacons, and fan-retention and analytics platform Super Fan.

Plus, these startups often don’t require massive marketing budgets to grow.

“Companies that can use product-led growth, that are software-focused, and build for core functions of the economy, I think that’s what matters right now,” SignalFire’s Constine said. “Versus startups where they can grow fast, but they have to do it by pouring millions and millions into ads.”

Options — and optimism — for early-stage startups

Another strategy shift some investors are taking is to focus on earlier stage companies that require less capital.

For firms like Night Ventures, Behind Genius Ventures and CreatorLed, which focus on funding pre-seed and seed rounds, deals are somewhat business as usual.

But to win investor dollars, these companies need to prove they have a promising product or service ready to go.

“What we want to see more and more now is definitely a focus towards actionable MVPs or demos,” said Eric Kullberg, cofounder and general partner at CreatorLed Ventures. 

How VCs are advising their existing portfolio companies 

Investors are also working closely with portfolio companies to help them survive what could be an extended period of economic decline.

Night Ventures’ advice to startups under its wing is similar to its advice to creators: “Do as much as you possibly can to extend runway,” Mathews said. 

While some companies are cutting 5% to 10% of expenditures, Mathews thinks pushing those cutbacks to 20% or 30% will make all the difference in terms of who comes out unscathed in the next two years.

Creator startups must also prepare for a possible drop-off in business from their core customers during a possible recession.

“Creators are going to see a lot less revenue coming in their door,” Mathews said. “So if your ultimate customer is a creator and you’re expecting them — like Beacons, for example — to pay a certain fee, be cognizant of the fact that they’re going to have less cash flow on hand.”