Enterprise Capital in Down Markets: Suggestions for Early-stage Funding



In a bull market, startup founders have many forces at their backs—together with an investor outlook that’s optimistic and threat tolerant. However when monetary circumstances get tougher, as they’ve in 2022, these tailwinds change into headwinds, and elevating capital turns into more durable. Traders shift their focus to battening down their portfolios’ hatches—usually by directing extra funds to their present firms—somewhat than searching for new alternatives. That signifies that to get investor consideration in a down market, startups on the lookout for early-stage funding have to adapt their techniques.

Whatever the economic system’s course in coming months, the volatility we’ve skilled in 2022 will most certainly have an effect on fundraising dynamics properly into 2023 and doubtlessly past. Whereas capital elevating and startup investing exercise has proved resilient thus far, the principles for efficiently closing a funding spherical are altering.

This chart compares the capital raised per year by VCs (represented as a bar graph) against the number of VCs who have been funded (represented as a line graph) from 2018 to June 30, 2022, the most recent data available. With minor fluctuations, the chart shows both series of data rising steadily until 2020 and then sharply to a high point in 2021. Even though the 2022 data only represents six months, the amount of capital raised has nearly caught up to the capital raised in all of 2021 and almost half as many VCs have been funded as were funded in 2021.
Regardless of the doom and gloom, US VC funds have loads of dry powder to go round. By the tip of June 2022, the latest information accessible, funds had almost caught as much as 2021’s year-end whole and outstripped earlier years.

Over greater than a decade, I’ve helped tons of of founders with early-stage funding, together with the historically underrepresented founders my fund works with, who typically face extra challenges. Consequently, I’ve realized lots about elevating enterprise capital when that capital is lower than forthcoming.

A lot of my recommendation on this article additionally applies throughout favorable markets, however throughout unsure occasions, the steps I define change into all of the extra essential as emphases shift. Understanding these nuances will assist you to get the funding you want, it doesn’t matter what the financial local weather.

Concentrate on Energetic Traders, Not Good Traders

Many occasions, I’ve seen new CEOs burn treasured time and sources figuring out what they understand as their supreme investor—one whose pursuits and priorities mesh completely with their targets—earlier than making an method. Though it’s fantastic to search out that form of match, this technique can typically result in evaluation paralysis, which isn’t one thing a startup can afford in a down market.

As a substitute, your search must be an ongoing technique of lively discovery as you construct a powerful pipeline of 100 or extra high-quality prospects and start to systematically attain out and have exploratory conversations. The one technique to discover the perfect investor is thru discussions with many certified prospects.

In a market that’s lower than flush, your first query shouldn’t be, “Who’s the right match for my imaginative and prescient?” however somewhat, “Who is an efficient match and nonetheless actively deploying capital?”

Watch investor information. You will discover lists of essentially the most lively traders in your area or sector by means of sources like AngelList. You can even establish potential traders by new funds that not too long ago closed. These funds want to start out deploying their capital. The sensible ones will perceive that down markets provide them the potential for extra favorable offers and last phrases as different traders change into unable or unwilling to spend money on new firms. Pay shut consideration to the information, LinkedIn, and Twitter, and contemplate setting Google alerts to remain knowledgeable.

Search for current liquidity occasions. Likewise, assessment sources comparable to PitchBook, consulting and banking corporations, and impartial analysis corporations for any current payouts in your market, geography, sector, or kind of expertise. These traders will quickly have dry powder accessible (and presumably be in temper as properly).

This chart is titled “Early-stage US VC Investing Activity” and consists of three colored lines graphed over a gray area graph ranging from 2018 to June 2022. The points on the area graph represent quarterly deal value as it nearly triples to a high of $90 billion at the end of 2021 and declines somewhat in 2022. Overlaid on that chart is a green line graphing the number of deals, which rises and falls modestly until a big jump in 2021 and falling again moderately in 2022. A dark blue line representing angel/seed funding remains steady, with modest variation, indicating little change over five years. A light blue line representing early stage investing by VCs nearly mirrors the Angel/Seed line, though is a bit lower.
Whereas VC investing is slowing down after the 2021 increase, it doesn’t appear to be cratering but. As of June 2022, the tempo of funding had returned to late 2020 ranges, whereas deal values remained excessive.

Begin native. As you begin to establish potential traders, you’ll need to focus your consideration regionally. Many early-stage traders are usually biased towards firms positioned in the identical metropolis or area. In a down market, when traders are holding on extra tightly to their money, founders can waste quite a lot of time wanting too far afield. That stated, typically geographical proximity is unattainable: In case you are a global founder trying to fundraise in the US—which is by far the most important supplier of startup capital, usually at extra engaging phrases—you possibly can create a proximity to VC hotbeds like New York Metropolis or San Francisco by connecting together with your nation’s consulate and expat organizations in these cities. They can introduce you to enterprise and funding leaders who can facilitate additional introductions and even make investments themselves.

Community, Community, Community

In a tough market, scoring an preliminary assembly turns into much more difficult, which implies it’s important to leverage the community of the investor’s portfolio and companions to your benefit.

Get referrals. As irritating as it might appear, particularly for first-time founders, a heat introduction from somebody the investor already is aware of is by far the easiest way to get their consideration. That is admittedly an inevitable operate of the insularity of the enterprise world and the sheer quantity of chilly calls that traders obtain. But it surely additionally occurs for one more, extra justifiable purpose. One of the vital essential qualities traders search for in a founder is the power to search out and safe needed sources—expertise, shoppers, media consideration, and financing. So the primary a part of the check is just whether or not you possibly can efficiently discover and get in contact with an investor that fits your corporation.

Analysis mutual relationships. Use LinkedIn to search out connections you’ve got in widespread together with your goal investor and ask them to facilitate an introduction. When you don’t have a connection to leverage, check out the investor’s portfolio holdings on their web site, after which use LinkedIn to see if any of your connections work at these firms. Alumni networks and related social, enterprise, or philanthropic organizations that you simply belong to will be one other priceless useful resource. And don’t overlook to assume past your instant contacts to their contacts as properly. I’ve observed that most individuals underestimate the scale of their second-degree networks. In a down market, you possibly can’t afford to be shy about asking for introductions.

Speak to different founders. Your community of different startup leaders is one other wealthy vein to mine, as they’ve already efficiently navigated their traders’ vetting and due diligence. Each time my fund finalized an funding in a brand new firm, the very first thing we might ask the founder for was the names of the three different founders they most revered. We sourced plenty of wonderful offers this manner. If this isn’t your first capital elevate, ask your current traders if they are going to join you with any of their different portfolio firms which have not too long ago raised capital. Speaking to those founders is an effective way to study extra about their different traders and the way finest to method them. For instance, I as soon as spent a yr making an attempt to assist a portfolio firm elevate its Collection A till we lastly realized that it was tackling a market much like that of one other portfolio firm that had efficiently closed a spherical of comparable measurement. We launched the 2 founders, and weeks later the identical group of traders executed that firm’s spherical, too.

Don’t hassle with a dealer. You might be tempted to rent a finder that can assist you safe priceless introductions, however I typically don’t advocate this, particularly for early-stage funding. A part of profitable your traders’ confidence is displaying that you could find your personal technique to the desk and are commiting your personal time to take action.

Tailor Your Pitch to the Investor’s State of Thoughts

When you’ve secured an viewers with an investor, it’s time to persuade the individuals you’re assembly with that yours is the one out of 100 (or extra) offers they’re contemplating that the majority warrants their capital.

In an up market, a good suggestion and powerful progress potential could also be sufficient for an keen investor. However in a troublesome market, traders are usually much less prepared to take an opportunity, which implies you possibly can’t simply polish your pitch and hope for the perfect. It’s important to tailor it to deal with VCs’ present angle towards investing and completely persuade a possible investor of your organization’s instant financial viability.

Making the trouble tougher, traders are likely to resolve nearly immediately. Beginning robust is essential once you make your pitch, and telling story is at all times essential. These are the 5 essential issues your investor must consider:

The issue you’re fixing is severe and pressing. Within the spirit of attending to the purpose immediately, you is perhaps tempted to front-load your deck with the answer, however don’t overlook to arrange the issue first. This step is very important in tough markets, during which I’ve seen rounds extra prone to shut based mostly on the scale and severity of the issue solved. That’s a change from the previous few bullish years, which have proven how throughout stronger markets, rounds can typically shut based mostly on the kind of resolution (like “Uber for X”) or just the wow issue of the expertise (such because the now-cooling enthusiasm for all issues blockchain). The scale, scope, and urgency of the issue you’re fixing speaks to your goal prospects’ willingness to make use of—and pay for—that resolution. Present somewhat than inform (to the extent attainable), and paint a vivid image of its penalties.

Your resolution is transformative. Prospects not often hassle themselves with adapting to a brand new product that’s solely marginally higher than the present providing. It’s not sufficient to say your product improves on effectivity, security, or effectiveness. Particularly once you’re dealing with risk-conscious traders, you need to show it reimagines how the market will operate.

You could have validated the market. Demonstrating that prospects are already utilizing your product or have signed as much as be among the many first to take action considerably decreases the perceived threat for traders. Even if you happen to haven’t opened the shop, with the ability to present a line down the road exterior is at all times extremely efficient, significantly throughout occasions of financial uncertainty. Wait lists, signed letters of intent, and locked-in distribution companions all validate market receptiveness.

Your concept is financially steady. Traders could typically overlook monetary stability, however they all of the sudden rediscover it when the economic system goes south. The 4 metrics you have to present VC traders to show long-term profitability are: Buyer lifetime worth that exceeds acquisition price; robust person retention; natural, somewhat than paid, progress; and a monetary mannequin that reveals you’ve got the pliability to preserve capital when needed and ramp up when financial circumstances permit.

The crew has operational, and ideally startup, expertise. Founders could also be shocked to study that the crew is by far one of many high components influencing the funding determination in a agency’s early levels. A fantastic concept isn’t value a lot if traders don’t have faith within the crew’s skill to execute. Put the crew slide early in your deck, and embody as much as three bullet factors that quantify every individual’s related expertise.

Create Urgency to Seal the Deal

Upon getting an investor on the desk, you continue to want to influence them to put in writing a test.

Be sure it’s a contest. Sadly, traders are likely to need to see others commit earlier than they do, which might result in a maddening state of affairs with many on the cusp of claiming sure, however none prepared to be the primary. And an investor can typically be extra prone to request aggressive phrases throughout a down market based mostly on the belief that it might be your solely possibility. I counsel startups to get a number of traders concerned in discussions and negotiations—and to verify each is aware of you’re courting different funders as properly. This must be conveyed diplomatically however firmly. This encourages potential traders to make a suggestion, the perfect phrases they’re prepared to contemplate.

Keep in mind that you’ve extra choices than you assume. When you can’t make a deal you possibly can stay with, don’t panic. There are nonetheless trillions of {dollars} ready to be invested on the market, and most of it isn’t tied up in enterprise capital. An more and more wealthy and various panorama of non-VC choices can enhance your probabilities of receiving the early-stage funding you want on the perfect phrases attainable. These embody angel traders, non-public fairness, household places of work, debt financing, and even on-line crowdfunding. (The steering I supplied right here may even serve you properly with any of these kind of traders.) And at last, you possibly can at all times contemplate bootstrapping.

All the time Come to the Desk Your self

If I can impart one final piece of recommendation, it’s this: Because the founder/CEO, the accountability to see fundraising by means of to completion rests with you—not your dealer, your marketing consultant, and even your different crew members. Though you possibly can and may embody different firm leaders at investor conferences, the largest mistake you can also make is to assume that accountability for the ultimate end result rests with anybody else.

From a practical perspective, there are some questions that solely the CEO can reply properly. And the psychology behind the precept is essential, too: Elevating capital your self sends a strong sign to traders that you’re dedicated to your enterprise and take their investments critically.

Among the finest founding CEOs I’ve recognized described his job as “setting the bigger strategic imaginative and prescient and making certain we by no means run out of money.” I do know it may be tempting to give attention to the primary half. However the second is simply as essential, and embracing that responsibility can go a good distance towards making your startup a hit, it doesn’t matter what the financial local weather.