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 grow to be headwinds, and elevating capital turns into tougher. Traders shift their focus to battening down their portfolios’ hatches—sometimes by directing extra funds to their present firms—fairly than searching for new alternatives. That signifies that to get investor consideration in a down market, startups in search of early-stage funding have to adapt their techniques.

Whatever the economic system’s path in coming months, the volatility we’ve skilled in 2022 will most probably have an effect on fundraising dynamics properly into 2023 and probably past. Whereas capital elevating and startup investing exercise has proved resilient to date, 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 top of June 2022, the latest knowledge obtainable, funds had practically caught as much as 2021’s year-end complete 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 typically face further challenges. Consequently, I’ve discovered loads 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 instances, the steps I define grow to be all of the extra necessary as emphases shift. Understanding these nuances will provide help to get the funding you want, it doesn’t matter what the financial local weather.

Give attention to Energetic Traders, Not Good Traders

Many instances, I’ve seen new CEOs burn treasured time and sources figuring out what they understand as their best investor—one whose pursuits and priorities mesh completely with their objectives—earlier than making an strategy. Though it’s great 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 an alternative, your search needs to be an ongoing strategy of energetic 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 method 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 proper match for my imaginative and prescient?” however fairly, “Who is an effective match and nonetheless actively deploying capital?”

Watch investor information. You will discover lists of probably the most energetic buyers in your area or sector via sources like AngelList. You can even establish potential buyers by taking a look at new funds that lately closed. These funds want to begin deploying their capital. The good ones will perceive that down markets supply them the potential for extra favorable offers and last phrases as different buyers grow to be unable or unwilling to put money into new firms. Pay shut consideration to the information, LinkedIn, and Twitter, and take into account setting Google alerts to remain knowledgeable.

Search for current liquidity occasions. Likewise, assessment sources comparable to PitchBook, consulting and banking companies, and unbiased analysis companies for any current payouts in your market, geography, sector, or sort of know-how. These buyers will quickly have dry powder obtainable (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 buyers, you’ll need to focus your consideration domestically. Many early-stage buyers are usually 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 loads of time trying too far afield. That stated, typically geographical proximity is unimaginable: In case you are a world founder trying to fundraise in the USA—which is by far the biggest supplier of startup capital, sometimes at extra engaging phrases—you’ll be able to 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 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 tough 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 could appear, particularly for first-time founders, a heat introduction from somebody the investor already is aware of is by far one of the simplest ways 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 buyers obtain. However it additionally occurs for one more, extra justifiable purpose. One of the crucial necessary qualities buyers search for in a founder is the flexibility to search out and safe needed sources—expertise, purchasers, media consideration, and financing. So the primary a part of the check is just whether or not you’ll be able to efficiently discover and get in contact with an investor that fits your enterprise.

Analysis mutual relationships. Use LinkedIn to search out connections you might have in frequent together with your goal investor and ask them to facilitate an introduction. For those who 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 could be one other useful useful resource. And don’t overlook to suppose past your fast contacts to their contacts as properly. I’ve seen that most individuals underestimate the scale of their second-degree networks. In a down market, you’ll be able to’t afford to be shy about asking for introductions.

Discuss 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. Every time 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 quite a lot of wonderful offers this fashion. If this isn’t your first capital elevate, ask your current buyers if they’ll join you with any of their different portfolio firms which have lately raised capital. Speaking to those founders is an effective way to study extra about their different buyers and the way greatest to strategy 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 just 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. Chances are you’ll be tempted to rent a finder that can assist you safe useful introductions, however I typically don’t suggest this, particularly for early-stage funding. A part of profitable your buyers’ confidence is exhibiting that you’ll find your individual method 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 folks 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 robust development potential could also be sufficient for an keen investor. However in a tricky market, buyers are usually much less prepared to take an opportunity, which suggests you’ll be able to’t simply polish your pitch and hope for the perfect. It’s a must to tailor it to handle VCs’ present angle towards investing and completely persuade a possible investor of your organization’s fast financial viability.

Making the hassle harder, buyers are inclined to resolve virtually immediately. Beginning sturdy is essential once you make your pitch, and telling story is all the time necessary. These are the 5 principal issues your investor must consider:

The issue you’re fixing is critical and pressing. Within the spirit of attending to the purpose straight away, you is likely to be 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, wherein 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 answer (like “Uber for X”) or just the wow issue of the know-how (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 prospects’ willingness to make use of—and pay for—that answer. Present fairly than inform (to the extent potential), and paint a vivid image of its penalties.

Your answer is transformative. Clients not often bother 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 buyers, it’s important to show it reimagines how the market will operate.

You will 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 buyers. Even for those who haven’t opened the shop, having the ability to present a line down the road exterior is all the time extremely efficient, notably throughout instances 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 typically overlook monetary stability, however they immediately rediscover it when the economic system goes south. The 4 metrics it is advisable present VC buyers to show long-term profitability are: Buyer lifetime worth that exceeds acquisition price; sturdy consumer retention; natural, fairly than paid, development; and a monetary mannequin that exhibits you might have the flexibleness to preserve capital when needed and ramp up when financial circumstances permit.

The staff has operational, and ideally startup, expertise. Founders could also be stunned to study that the staff is by far one of many prime components influencing the funding choice in a agency’s early phases. An amazing thought isn’t price a lot if buyers don’t believe within the staff’s means to execute. Put the staff slide early in your deck, and embrace as much as three bullet factors that quantify every individual’s related expertise.

Create Urgency to Seal the Deal

After you have an investor on the desk, you continue to want to influence them to write down a verify.

Ensure it’s a contest. Sadly, buyers are inclined 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 could be your solely choice. 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 needs to be conveyed diplomatically however firmly. This encourages potential buyers to make a suggestion, the perfect phrases they’re prepared to contemplate.

Keep in mind that you’ve got extra choices than you suppose. For those who can’t make a deal you’ll be able to dwell 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 the perfect phrases potential. These embrace angel buyers, non-public fairness, household workplaces, debt financing, and even on-line crowdfunding. (The steering I offered right here may even serve you properly with any of these kinds of buyers.) And at last, you’ll be able to all the time take into account bootstrapping.

At all times 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 via to completion rests with you—not your dealer, your guide, and even your different staff members. Though you’ll be able to and may embrace different firm leaders at investor conferences, the largest mistake you can also make is to suppose 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 necessary, too: Elevating capital your self sends a robust sign to buyers that you’re dedicated to your enterprise and take their investments critically.

Top-of-the-line 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 concentrate on the primary half. However the second is simply as necessary, and embracing that responsibility can go a great distance towards making your startup successful, it doesn’t matter what the financial local weather.


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