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January 4, 2024 Industry outlook | BANKING & FINANCE

In 2024, CT startups and stalwarts must confront VC funding gap, rising labor costs

Frank Milone

The state of Connecticut unveiled its “Make it Here” campaign in 2023 with a video highlighting what can be “made” in the Nutmeg State: a family, pizza, championship team and submarine, to name a few.

The slogan, of course, plays on Connecticut’s longtime position as a manufacturing center and, for me, it also calls to mind the state’s more recent success as a hub for tech and bioscience.

Amid a constrained and uncertain economic climate, both newer and more established companies in Connecticut face a host of challenges, but “making it here” comes with undeniable advantages as well.

Overcoming wary investors

It’s no secret that in Connecticut and elsewhere, venture capitalists have been more cautious over the past two years.

In the next 12 to 18 months, access to venture and growth capital most likely will not get any easier.

While investors remain reticent, they do continue to invest. Founders who can effectively define the problem they’re solving and make a strong case for the innovation they’ve made are still getting funded, especially in industries that are strong for Connecticut, such as digital health, biotech and fintech.

These industries remain attractive to investors because of their potential to provide immense exit value. They will also be some of the first industries to heat up once the IPO market gets going again, which puts Connecticut in a strong position to take advantage of a market rebound.

Medical device startups in particular are creating products that are highly sought after by the largest global players in health care, many of whom are based or have offices here.

With long, profitable histories, these companies have their own funds to invest in promising innovations.

But even in bioscience, early stage companies that haven’t yet proven their concept may have some difficulty obtaining funding. These companies have to get creative with options like crowdfunding, grants or debt financing.

Interest rates are, of course, much higher than any time in recent memory, but they’re still not unmanageably high, and increases seem to have plateaued.

In the short term, companies using debt to grow have to factor in a greater portion of proceeds going to debt service than they might like, but it can be done.

Banks also continue to lend, though they are strengthening the required covenants — both financial and operational — that come with that capital.

These mileposts can have less flexibility than objectives outlined by VC investors, but if the company has the financial discipline to manage them, the founders will retain more equity.

Companies with history can make gains

While some in Connecticut seek to “make it” in the high-stakes startup world, others look to continue growing businesses first “made” here decades ago in fields like manufacturing.

These companies face their own set of challenges, particularly rising labor costs.

With an overall labor shortage and companies moving into Connecticut for the talented workforce, job seekers continue to have the upper hand in the marketplace.

This, combined with inflation, has pushed starting salaries at many companies higher, which then causes upward pressure on all salaries to retain team members.

Inflation may also enable price increases, but there’s typically a delay between when those decisions are made and when the increased revenues are realized. For established companies in need of capital to cover the gap, debt financing remains available.

Even with interest rates more than double what they were two years ago, companies with a strong growth plan can build in debt service.

Growth may be slower or more modest, but don’t let the headwinds of the labor market and interest rates push you out of a growth mind-set altogether.

Frank Milone is co-founding partner of Glastonbury-based Fiondella, Milone and LaSaracina LLP (FML CPAs).

Check out the rest of HBJ's 2024 economic forecast issue

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