Think of all the activities that go into raising money for your startup: networking, cold outreach, meetings with lawyers and investors, execution of legal documents, etc.
Fundraising is hard enough. Add in the current economic downturn, and startup leaders are facing an uncertain fundraising future.
However, this isn’t the first time founders and early employees have navigated difficult circumstances. Startup success stories such as Venmo, Instagram, Uber and WhatsApp all laid their foundation during The Great Recession of 2008. Tough times often spur the innovation that precedes great company building.
What’s the best way to fundraise in a down market? We spoke to four experts from the VC and venture-debt world during a recent live event.
Aziz Gilani (Managing Director at Mercury Fund), Adam Midkiff (Principal, RC Capital), Caroline Tkatschow (Director, Innovation Banking at CIBC) and Mark Gilbert (Executive Director, Espresso Capital) shared their insights.
The panelists agreed that startups will be more attractive to VCs if they can show:
- High revenue growth
- Impressive gross margins
- A scalable business model, backed by a proven team
Beyond these foundational elements, we’ve compiled five tips from these industry experts to help early-stage companies frame the fundraising landscape. You’ll learn some strategies to keep in mind as you engage with venture capital firms and other investors:
1. Have a more clear plan for your investor’s money.
When you’re asking for their money, VCs typically want to see a clear plan, backed with data.
“What is the equity value creation you haven’t been able to access because of a lack of capital?” said Adam Midkiff, Principal at RC Capital. “That’s how I think about the sequential story and how you can best prepare for those [investor] conversations.”
Is there a sales or marketing campaign that will help boost your revenue? What about a product innovation, geographic expansion or merger & acquisition that opens you up to a new market?
The product or service that got you to your Series A isn’t the same as the one that will bring you to Series B and beyond. You’ll need to innovate, and investors want to know how. Underscore your previous accomplishments by showing your numbers and providing visibility into what’s next.
2. Be honest about your targets – and prepare for the worst.
Too many startup financial forecasts show massive growth with sizable cash burn, failing to recognize the possibility that things don’t go according to plan.
Investors don’t want blind optimism. You’ll be more appealing if you understand a.) that things can go wrong and b.) what levers of your business you can pull to maintain growth.
“The question is – if you're hitting 50% of your plan, then what does your burn look like?” said Mark Gilbert, Director, Espresso Capital. “What does your remaining runway look like?’”
Running a business is easier when things are going well; you need to show investors that your leadership team is capable of handling any scenario.
3.Quickly determine whether a potential partner is serious about investing.
We know that fundraising is time-consuming. Especially in uncertain economic times, it’s important to get the most value out of your time – and that means focusing on the VCs that actually want to work with you.
Pay attention to the little things. How quickly are potential investors responding to emails and scheduling meetings? Are they asking baseline questions or showing that they’ve done their prep work?
It’s okay to be direct with investors to make sure they’re truly interested. “The direct question [to investors] is: hey I’m hearing stories about people pulling term sheets. How do I prevent that?” said Aziz Gilani, Managing Director at Mercury Fund.
Investors are more than a source of capital – they are usually trusted advisors and collaborators in scaling your company. In many ways, investors need to prove to you that they’ll be a beneficial collaborator – just like you need to show your company’s strength and potential. Make sure potential investors are aligned and on-board so they can be true assets to your growth.
4. Consider non-dilutive sources of capital.
Startup valuations have dipped[1] in 2022. If you’re giving away a larger chunk of equity for the same amount of capital, why not consider something different?
Non-dilutive financing provides capital that doesn’t require an owner to give up any equity or ownership of their company. Common examples include:
- Revenue-based financing, which provides upfront cash in exchange for a percentage of ongoing revenue
- Asset-based financing, which is a loan secured by inventory, accounts receivable, equipment, or other property owned by the borrower
- Venture debt has many types, with term loans being the most common
Non-dilutive financing becomes more popular in a down market because it doesn’t take valuations or equity into account. Multiples –the metrics that can help startups gauge the market and determine their valuation – are currently down. This could suggest a rise in non-dilutive financing on the horizon
“Founders are thinking, we need anti-dilutive capital because the market multiples at present are maybe going to cause them to raise on a down round,” said Caroline Tkatschow, Director, Innovation Banking at CIBC.
5. ABF: Always be fundraising!
Very few investors are writing a check for an equity financing round after the first call. It might take two years after your initial meet-up before they’re ready to invest.
That’s where the “ABF” acronym comes into play. “Always Be Fundraising” doesn’t mean that you should be selling off pieces of your company at every turn.
“It doesn’t necessarily mean you are always taking on capital,” Midkiff said. “It’s a relationship-building effort…The significant majority of companies that we invested in, we met 18 months prior, 24 months prior.”
Once you get to know a potential VC partner, tell them your plan for the next 12 months. It’s much easier to ask for capital once you’ve executed that plan and returned for another discussion.
So, what does startup fundraising look like in 2022? It might involve some non-dilutive funding that allows you to make it through the next few months and affords you time to grow relationships with potential colleagues. Landing a new investment fellow may include having a clear plan, knowing your worth and seeking out the right VCs for you.
The economy moves in cycles. We might be in a downturn but building the right habits will help your company solidify its fundraising future.
[1] Are The Good Times Over? Startup Valuations Dip As Inflation, Geopolitical Issues And Pandemic Concerns Swirl (crunchbase.com)
Looking for insight into how startups can bolster their fundraising efforts in an economic downturn? Check out our free webinar, “Raising Capital in Uncertain Times: Investor and Lender Perspectives.” Four experts from VC and venture-debt firms joined the webinar to discuss current trends and offer tips to growing companies.
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