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

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 danger tolerant. However when monetary circumstances get tougher, as they’ve in 2022, these tailwinds change into headwinds, and elevating capital turns into tougher. Buyers shift their focus to battening down their portfolios’ hatches—usually by directing extra funds to their present corporations—fairly than looking for new alternatives. That signifies that to get investor consideration in a down market, startups on the lookout for early-stage funding must adapt their ways.

Whatever the economic system’s path in coming months, the volatility we’ve skilled in 2022 will most definitely have an effect on fundraising dynamics properly into 2023 and doubtlessly 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 newest knowledge 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 a whole bunch 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 rather a lot 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 necessary as emphases shift. Understanding these nuances will enable you get the funding you want, it doesn’t matter what the financial local weather.

Concentrate on Lively Buyers, Not Good Buyers

Many occasions, I’ve seen new CEOs burn treasured time and assets figuring out what they understand as their best investor—one whose pursuits and priorities mesh completely with their targets—earlier than making an method. 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 technique of energetic 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 solution to discover the very 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 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 essentially the most energetic traders in your area or sector by sources like AngelList. It’s also possible to determine potential traders by taking a look at new funds that not too long ago 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 closing phrases as different traders change into unable or unwilling to put money into new corporations. Pay shut consideration to the information, LinkedIn, and Twitter, and contemplate setting Google alerts to remain knowledgeable.

Search for current liquidity occasions. Likewise, overview sources similar to PitchBook, consulting and banking corporations, and unbiased analysis corporations for any current payouts in your market, geography, sector, or sort of know-how. 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 growth, 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 determine potential traders, you’ll need to focus your consideration domestically. Many early-stage traders are usually biased towards corporations situated 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 trying too far afield. That mentioned, typically geographical proximity is unimaginable: In case you are a global founder trying to fundraise in the USA—which is by far the most important supplier of startup capital, usually at extra enticing 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 can 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 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 perform of the insularity of the enterprise world and the sheer quantity of chilly calls that traders obtain. Nevertheless it additionally occurs for an additional, extra justifiable cause. Probably the most necessary qualities traders search for in a founder is the power to search out and safe mandatory assets—expertise, shoppers, 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 what you are promoting.

Analysis mutual relationships. Use LinkedIn to search out connections you have got in frequent together with your goal investor and ask them to facilitate an introduction. In the event 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 corporations. Alumni networks and related social, enterprise, or philanthropic organizations that you simply belong to will be one other priceless useful resource. And don’t neglect to assume past your speedy 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’ll be able to’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 numerous glorious offers this fashion. If this isn’t your first capital increase, ask your current traders if they are going to join you with any of their different portfolio corporations which have not too long ago raised capital. Speaking to those founders is a good way to study extra about their different traders and the way greatest to method them. For instance, I as soon as spent a 12 months making an attempt to assist a portfolio firm increase its Sequence 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 traders 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 priceless introductions, however I typically don’t advocate this, particularly for early-stage funding. A part of successful your traders’ confidence is displaying that you will discover your personal solution 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 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 tricky market, traders are usually much less keen to take an opportunity, which suggests you’ll be able to’t simply polish your pitch and hope for the very best. You must tailor it to deal with VCs’ present perspective towards investing and totally persuade a possible investor of your organization’s speedy financial viability.

Making the trouble tougher, traders are likely to determine nearly immediately. Beginning sturdy is essential if you make your pitch, and telling story is all the time necessary. These are the 5 most important 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 could be tempted to front-load your deck with the answer, however don’t neglect to arrange the issue first. This step is particularly very important in troublesome markets, wherein I’ve seen rounds extra more likely 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 know-how (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 clients’ willingness to make use of—and pay for—that resolution. Present fairly than inform (to the extent potential), and paint a vivid image of its penalties.

Your resolution 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 if you’re going through risk-conscious traders, 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 danger for traders. Even should you haven’t opened the shop, having the ability to present a line down the road outdoors is all the time extremely efficient, notably 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. Buyers could typically overlook monetary stability, however they all of the sudden rediscover it when the economic system goes south. The 4 metrics you might want to present VC traders to show long-term profitability are: Buyer lifetime worth that exceeds acquisition value; sturdy consumer retention; natural, fairly than paid, progress; and a monetary mannequin that exhibits you have got the pliability to preserve capital when mandatory and ramp up when financial circumstances permit.

The workforce has operational, and ideally startup, expertise. Founders could also be shocked to study that the workforce is by far one of many prime elements influencing the funding determination in a agency’s early levels. An ideal concept isn’t value a lot if traders don’t believe within the workforce’s skill to execute. Put the workforce slide early in your deck, and embrace as much as three bullet factors that quantify every particular person’s related expertise.

Create Urgency to Seal the Deal

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

Be sure it’s a contest. Sadly, traders are likely to need to see others commit earlier than they do, which may result in a maddening scenario with many on the cusp of claiming sure, however none keen to be the primary. And an investor can typically be extra more likely to request aggressive phrases throughout a down market based mostly on the belief that it could be your solely possibility. I counsel startups to get a number of traders 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 traders to make a suggestion, the very best phrases they’re keen to contemplate.

Bear in mind that you’ve got extra choices than you assume. In the event you 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 numerous panorama of non-VC choices can enhance your possibilities of receiving the early-stage funding you want on the very best phrases potential. These embrace angel traders, non-public fairness, household places of work, debt financing, and even on-line crowdfunding. (The steering I offered right here may also serve you properly with any of some of these traders.) And eventually, you’ll be able to all the time contemplate 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 by to completion rests with you—not your dealer, your advisor, and even your different workforce members. Though you’ll be able to and will embrace different firm leaders at investor conferences, the largest mistake you may make is to assume that accountability for the ultimate final result 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 necessary, too: Elevating capital your self sends a robust sign to traders that you’re dedicated to your enterprise and take their investments critically.

The most effective founding CEOs I’ve recognized described his job as “setting the bigger strategic imaginative and prescient and guaranteeing we by no means run out of money.” I do know it may be tempting to deal with the primary half. However the second is simply as necessary, and embracing that obligation can go a great distance towards making your startup successful, it doesn’t matter what the financial local weather.