Navigating the Current Turbulent Fundraising Environment
Insights from a Recent Webinar
Last month, I was a featured speaker in a webinar organized by H4XLabs, where we explored the latest fundraising trends. H4XLabs is an enterprise accelerator that supports Deep Tech company founders tackling hard problems from concept through scaling. You can watch the video recording of "Considerations In Fundraising and Financing Trends" for those who missed it.
While our discussion covered market trends, I also shared valuable fundraising advice tailored especially for founders. Navigating the intricacies of the fundraising landscape can be challenging, and in this post, I aim to provide practical insights to support founders in this journey.
In this post, we'll delve deeper into tactical advice, including:
Time Constraints: As we approach the holiday season, discover why time is of the essence for founders aiming at substantial fundraising rounds.
Venture Market Decline: Explore the continuous downturn in deal volume and capital raised, as outlined in Carta's latest venture market report.
Adjusting Your Narrative: Learn why adjusting your fundraising story is crucial in the current market conditions.
Investor Relations Strategies: Gain practical insights into managing investor relations during challenging times.
Proactive Fundraising Practices: Explore savvy moves beyond pitch meetings.
Decision Dilemmas: Founders contemplating funding during the downturn face crucial decisions and need contingency plans.
Time Is Not On Your Side
As you gear up for your fundraising efforts, here's a critical heads-up (as of the publication date, October 17th).
With the holiday season approaching, time is of the essence. You have just one month to wrap up your fundraising initiatives, primarily if you aim for a substantial round beyond the pre-seed or friends & family stage.
In addition, investors may find it challenging to process transactions due to uncertainties tied to broader economic conditions. Hence, thoughtful planning is critical for founders navigating this time-sensitive landscape.
Continued Decline in the Venture Market
Adding to the complexity is the prevailing decline in the venture market, a trend outlined in Carta's latest venture market report. Quarter after quarter this year, deal volume and capital raised have witnessed a continuous downturn.
According to Carta, one reason behind the fundraising slowdown is the differing expectations between investors and companies. Investors are eager for a reset in private valuations to mirror the decline seen in public valuations.
However, most companies are cautious about opting for a down round. As investors await more clarity, companies are cutting back on expenses to reduce burn rates and are patiently waiting for a more favorable fundraising environment.
In addition, this downturn is now trickling down to impact fundraising at the early stage, as illustrated in the chart below:
For more in-depth insights, you can explore the complete market report here. I highly recommend following Peter Walker, Carta’s Head of Insights, to stay abreast of regular market updates.
In the face of these market dynamics, I want to provide some actionable insights to navigate these challenges successfully.
Adjust Your Narrative To Embrace the New Reality
Once founders recognize the urgency and current market conditions, adjusting the fundraising story is crucial.
This adaptation aims to build momentum, expedite round closures, and ideally position your startup to command premium pricing with heightened investor interest.
Let's explore the two main narrative categories.
Capital Efficiency
In the Zero Interest Rate Policy (“ZIRP”) era, the venture market saw an influx of capital that fueled investor enthusiasm for startup investments. This enthusiasm translated into a surge in deals and premium valuations for founders.
Amid this era of abundant capital, there was a prevailing mindset favoring founders to prioritize rapid growth at any cost, leading to overhiring.
However, as the market dynamics shifted, so did investors' sentiments toward prioritizing efficient growth.
The key takeaway for your narrative crafting should include:
Demonstrating that your company operates with a leaner structure and enhanced cost control.
Outlining the path toward achieving cash flow positivity or self-sufficiency.
Presenting realistic milestones and expectations with a transparent view of the burn rate and runway.
Show, Don’t Just Tell
Continuing our discussion on adjusting your fundraising story, let's discuss what's happening in the startup world. In the recent YC Summer 2023 group, startups were nudged to speed up their sales game and prove they're gaining traction in the market.
“Many startups wait quite a while to build a product, test, and get into the market, but I was struck by the speed at which this cohort gained commercial traction. In previous years, companies would spend more time ideating, but the changing market conditions seem to have lit a fire under founders to make their business revenue at the outset.” - Eli Blee-Goldman’s LinkedIn post.
Chatting with investors is not just about pitching cool ideas, especially in a more challenging market. Unless you're one of those super cool AI startups, getting funding for your ideas might not fly.
What's even more important today is to show real progress. It's not only about saying you're making money but proving it's sustainable and of good quality. Back then, you could get away with fancy numbers that didn't mean much, but now investors want more substance.
That means:
Winning big deals with enterprise companies.
Showing off important ways your product or service is being used.
Proving your contracts are getting bigger.
Make it clear that people who use your stuff keep coming back, and they're not leaving.
In this world where every dollar counts, investors are wary of founders relying on small deals that might not stick around. So, when talking about your startup, ensure you're not just telling a story but showing the real, solid progress you're making. It's not just what you say; it's what you can prove!
Take Charge of Your Fundraising Journey
Now that you've got some insights into shaping your pitch deck and impressing investors in meetings let's not overlook the opportunities to manage your fundraising process for quicker success actively.
Do Your Homework on Potential Investors
Smart founders who've been around the fundraising block know that doing some homework on potential investors pays off big time.
Different types of angel investors exist, especially in well-established startup hubs like the Bay Area. Many of these angels are tech-savvy operators or former founders themselves. They invest for various reasons, such as:
Hunting for potential big winners to build a track record for a future venture capital career.
Wanting to support founders in their specific area of expertise, whether it's B2B sales or developer tools.
Backing underrepresented groups, like minorities and women, who might face challenges in attracting early-stage capital.
Knowing the type of investor you're dealing with helps you tailor your story to match what they care about.
For founders eyeing VC funding, I often advise them to dig into the backgrounds of key partners in the VC firm and understand the fund's overall mission. This way, you can explain why your startup is the perfect fit for their support.
Consider the Current Climate
In today's financial climate, it's essential to recognize how the fundraising landscape is impacting venture capitalists (VCs). Many VC funds find it challenging to gather capital from their investors (LPs) because their money is tied up in previous funds. LPs have too much invested in risky assets, making things even trickier.
Here's where founders need to be savvy. Knowing which VCs are actively fundraising and which ones might be a bit cash-strapped can guide your strategy. Prioritize your outreach to those with the means to invest, making your fundraising journey more targeted and effective.
Other Best Practices
Let's dive into some additional savvy moves that can make your fundraising journey even more effective.
Smart startups I've come across don't just stop at pitch meetings—they share Notion documents before and after. Why? It's a twofold win: First, it answers those Frequently Asked Questions (FAQs), and second, it allows founders to address the critical risks of their companies proactively.
This proactive approach streamlines the process and nudges investors toward quicker decisions.
Another gem is creating a handy "Read Me" guide in your data room. This guide acts like a compass for investors, helping them navigate critical data such as customer contracts, financials, and patents. Making vital information accessible positively reflects on your startup and significantly speeds up decision-making.
For founders tackling the challenge of building a financial model for a price round such as Series A, check out Roy Bahat's Making a Financial Model for your early-stage startup post and watch Kirsty Nathoo's Managing Startup Finances video. These resources provide invaluable insights into structuring your financial plans for success.
Given my deep finance background, I often counsel founders to invest extra time discussing financial modeling assumptions. While predicting the next five years for an early-stage startup might seem like a crystal ball exercise, focusing on the assumptions section is vital. A robust assumptions section should tackle critical questions:
What are the key drivers?
Where do the unit economics improve over time or with scale?
What are the key milestones?
What are the founders' long-term plans to achieve their goals?
In summary, supplemental documents like Notion files, FAQs, Read Me guides, and Financial Modeling Assumptions should seamlessly tie back to the crucial points we explored—Capital Efficiency and Show, Don't Just Tell. These practices enhance the efficiency of your fundraising process and reinforce the narrative you're building.
Closing Thoughts
For those founders fortunate enough to secure funding during the ZIRP era at record-high valuations, a crucial decision looms: whether to raise during a downturn to execute expansion plans or await a market upswing.
As explored in the Considerations In Fundraising and Financing Trends recording, the market's resurgence hinges on robust IPO deals bringing liquidity back to LPs and increased macro certainty, often tied to interest rate changes.
Startups that have secured at least one funding round but are yet to attain Product Market Fit face a pivotal question. By delving into Paul Graham's essay, determine whether your startup is in a "default alive" or "default dead" status. If fundraising is on your radar, brace yourself for an extended process and heightened competition for limited investor capital. Have contingency plans (B and C) ready based on your startup's default status.
Feel free to share your thoughts below or contact me for more insights.
For those seeking detailed data on the current venture market by sector or geography, delve into Carta’s latest Q3 report.
Following Post Preview: Launching Your Startup Right
As we navigate the world of fundraising, it's essential to lay a strong foundation. In the next post, I'll share crucial advice for budding founders considering the launch of their startup, including:
Build a Solid Foundation: Explore the vital elements for a successful startup launch.
Founder Dynamics: Discover actionable insights with '50 Questions to Explore with a Potential Co-Founder,' ensuring a solid foundation for enduring partnerships.
Customer-Centric Approach: Learn why talking to customers is critical to creating the right product for the right audience.
Building Your Team: Understand the importance of finding the right people for the long journey ahead.
Last but not least, if you've found posts like these valuable, subscribe to Ante Up.
My prior guide is a must-read for founders searching for a comprehensive playbook on fundraising.
If you're eager to learn more or have questions, contact me on Twitter (X).
Thanks always to Jen Liao and Jaireh Tecarro for the support and feedback.
Best,
PS: Sign up ☟ if you find this interesting. Email me if you have excellent topics you'd like me to explore further!