Enterprise Capital in Down Markets: Ideas 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 situations get more difficult, 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—sometimes by directing extra funds to their present firms—relatively than looking for new alternatives. That implies that to get investor consideration in a down market, startups in search of early-stage funding have to adapt their ways.

Whatever the financial system’s path in coming months, the volatility we’ve skilled in 2022 will almost certainly have an effect on fundraising dynamics properly into 2023 and probably past. Whereas capital elevating and startup investing exercise has proved resilient to this point, the foundations 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 top of June 2022, the latest knowledge obtainable, funds had practically caught as much as 2021’s year-end whole and outstripped earlier years.

Over greater than a decade, I’ve helped a whole bunch of founders with early-stage funding, together with the historically underrepresented founders my fund works with, who usually face extra challenges. Because of this, I’ve realized quite a bit 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 vital as emphases shift. Understanding these nuances will make it easier to get the funding you want, it doesn’t matter what the financial local weather.

Concentrate on Lively Traders, Not Excellent Traders

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

As an alternative, your search must be an ongoing means of lively discovery as you construct a robust pipeline of 100 or extra high-quality prospects and start to systematically attain out and have exploratory conversations. The one strategy to discover one of the best 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 relatively, “Who is an efficient match and nonetheless actively deploying capital?”

Watch investor information. Yow will discover lists of probably the most lively buyers in your area or sector by means of sources like AngelList. You can too establish potential buyers by taking a look at 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 ultimate phrases as different buyers change into unable or unwilling to put money into new firms. Pay shut consideration to the information, LinkedIn, and Twitter, and contemplate setting Google alerts to remain knowledgeable.

Search for latest liquidity occasions. Likewise, assessment sources corresponding to PitchBook, consulting and banking companies, and impartial analysis companies for any latest payouts in your market, geography, sector, or sort of expertise. These buyers will quickly have dry powder obtainable (and presumably be in a superb 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 buyers, you’ll need to focus your consideration regionally. Many early-stage buyers are typically biased towards firms positioned in the identical metropolis or area. In a down market, when buyers are holding on extra tightly to their money, founders can waste numerous time wanting too far afield. That mentioned, generally geographical proximity is unattainable: If you’re a world founder trying to fundraise in the US—which is by far the biggest supplier of startup capital, sometimes at extra enticing phrases—you possibly can create a proximity to VC hotbeds like New York Metropolis or San Francisco by connecting along with your nation’s consulate and expat organizations in these cities. They are able to introduce you to enterprise and funding leaders who can facilitate additional introductions and even make investments themselves.

Community, Community, Community

In a troublesome market, scoring an preliminary assembly turns into much more difficult, which suggests 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 perform of the insularity of the enterprise world and the sheer quantity of chilly calls that buyers obtain. But it surely additionally occurs for one more, extra justifiable motive. One of the vital qualities buyers search for in a founder is the power to seek out and safe essential assets—expertise, purchasers, media consideration, and financing. So the primary a part of the take a look at is just whether or not you possibly can efficiently discover and get in contact with an investor that fits your online business.

Analysis mutual relationships. Use LinkedIn to seek out connections you’ve gotten in frequent along with your goal investor and ask them to facilitate an introduction. Should 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 comparable social, enterprise, or philanthropic organizations that you just belong to might be one other invaluable useful resource. And don’t overlook to assume past your quick 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 buyers’ vetting and due diligence. At any time when my fund finalized an funding in a brand new firm, the very first thing we’d ask the founder for was the names of the three different founders they most revered. We sourced a lot of wonderful offers this manner. If this isn’t your first capital elevate, ask your present buyers if they may 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 buyers and the way finest to method them. For instance, I as soon as spent a 12 months attempting to assist a portfolio firm elevate its Sequence 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 dimension. We launched the 2 founders, and weeks later the identical group of buyers executed that firm’s spherical, too.

Don’t hassle with a dealer. It’s possible you’ll be tempted to rent a finder that can assist you safe invaluable introductions, however I typically don’t suggest this, particularly for early-stage funding. A part of successful your buyers’ confidence is exhibiting that you could find your individual strategy to the desk and are commiting your individual 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 almost all warrants their capital.

In an up market, a good suggestion and robust progress potential could also be sufficient for an keen investor. However in a troublesome market, buyers are typically much less prepared to take an opportunity, which suggests you possibly can’t simply polish your pitch and hope for one of the best. You need to tailor it to deal with VCs’ present perspective towards investing and completely persuade a possible investor of your organization’s quick financial viability.

Making the hassle tougher, buyers are likely to resolve nearly immediately. Beginning robust is essential if you make your pitch, and telling a superb story is all the time vital. These are the 5 major issues your investor must consider:

The issue you’re fixing is severe and pressing. Within the spirit of attending to the purpose instantly, you could be tempted to front-load your deck with the answer, however don’t overlook to arrange the issue first. This step is very very important in troublesome markets, by which I’ve seen rounds extra prone to shut primarily based 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 usually shut primarily based on the kind of answer (like “Uber for X”) or just the wow issue of the expertise (such because the now-cooling enthusiasm for all issues blockchain). The dimensions, scope, and urgency of the issue you’re fixing speaks to your goal clients’ willingness to make use of—and pay for—that answer. Present relatively than inform (to the extent potential), and paint a vivid image of its penalties.

Your answer is transformative. Clients 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 if you’re dealing with risk-conscious buyers, it’s important to show it reimagines how the market will perform.

You’ve gotten validated the market. Demonstrating that clients 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 buyers. Even in the event you haven’t opened the shop, having the ability to present a line down the road outdoors is all the time extremely efficient, significantly throughout occasions of financial uncertainty. Wait lists, signed letters of intent, and locked-in distribution companions all validate market receptiveness.

Your thought is financially secure. Traders might generally overlook monetary stability, however they all of the sudden rediscover it when the financial system goes south. The 4 metrics it’s worthwhile to present VC buyers to show long-term profitability are: Buyer lifetime worth that exceeds acquisition price; robust consumer retention; natural, relatively than paid, progress; and a monetary mannequin that exhibits you’ve gotten the flexibleness to preserve capital when essential and ramp up when financial circumstances permit.

The crew has operational, and ideally startup, expertise. Founders could also be stunned to study that the crew is by far one of many high components influencing the funding choice in a agency’s early phases. A terrific thought isn’t value a lot if buyers don’t have faith within the crew’s potential to execute. Put the crew slide early in your deck, and embody as much as three bullet factors that quantify every particular person’s related expertise.

Create Urgency to Seal the Deal

After getting an investor on the desk, you continue to want to influence them to jot down a test.

Ensure that it’s a contest. Sadly, buyers 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 usually be extra prone to request aggressive phrases throughout a down market primarily based on the belief that it might be your solely possibility. I counsel startups to get a number of buyers concerned in discussions and negotiations—and to ensure every one is aware of you’re courting different funders as properly. This must be conveyed diplomatically however firmly. This encourages potential buyers to make a proposal, one of the best phrases they’re prepared to contemplate.

Bear in mind that you’ve got extra choices than you assume. Should 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 possibilities of receiving the early-stage funding you want on one of the best phrases potential. These embody angel buyers, personal fairness, household places of work, debt financing, and even on-line crowdfunding. (The steerage I supplied right here may even serve you properly with any of a majority of these buyers.) And eventually, you possibly can all the time 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 advisor, 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 consequence rests with anybody else.

From a realistic perspective, there are some questions that solely the CEO can reply properly. And the psychology behind the precept is vital, too: Elevating capital your self sends a robust sign to buyers that you’re dedicated to your enterprise and take their investments severely.

Probably the greatest founding CEOs I’ve identified 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 vital, and embracing that responsibility can go a good distance towards making your startup a hit, it doesn’t matter what the financial local weather.


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