Harlem Capital Answers Your Top Questions About Fundraising During a Pandemic

It’s no secret that some founders have been historically overlooked by traditional VCs. Harlem Capital, a New York-based VC fund, is righting that wrong by solely investing in women- and minority-run companies that are shaking up the status quo.

The fund started in 2016 after the founders realized that there was a huge lack of capital going to talented women and people of color. They’re industry and geography agnostic — and recently closed a $40 million fund that will bring them closer to their goal of investing in over 1,000 underrepresented entrepreneurs over the next two decades.

During our digital events series, we chatted with Kelly Kopchik Goldstein and Gabby Cazaeu, two Senior Associates at Harlem Capital, about founders’ top fundraising and pitching questions. Here’s a recap of their advice.

1. Should founders try to fundraise right now?

Kelly: If you have 24 months or more of runway, I’d suggest you focus on your business right now.

We’re suggesting 24 to 30 months of runway because the 2008 recession lasted about 18 months. This situation could be the same, or it could be worse. So give yourself some buffer.

If you’re planning on fundraising, don’t stop, but know that it’s going to be a longer, more nerve-wracking process.

“Keep going after it, and know that you’re not alone.”

Deals were moving really quickly leading up to this crisis, and now you can anticipate maybe a six-month timeframe. It’s going to be a slog.

In 2008, again, there was about a 50% drop in overall venture funding. In New York, recent studies suggest that firms are still actively investing, but they’re more risk-averse. They’re slowing down their investments and being more thoughtful.

Because of all this, it’s important to have a support system of people you can talk to. Take the necessary steps to take care of yourself.

2. Have investors’ threshold for risk changed?

Gabby: Yes. How quickly we come back to normal will dictate how long this shock to the system will last.

We think about risk in three buckets:

• Market risk: This risk threshold is definitely the highest, since it depends on the individual category and the macro trends.
• Business risk: If you have a business with a high burn rate or unfavorable unit economics, it’s going to be tough. We really look at business risk while doing due diligence on the companies in our pipeline.
• Operational risk: This type of risk is par for the course since we invest at the seed and Series A stage. As we look at companies, there will always be some form of operational risk, whether it’s related to go-to market execution or strategy.

A higher level of precision is going to be required as companies make these pivots in response to COVID-19 — and their belief in what those pivots will do as the business grows.

“The bar for investing is a little higher now.”

And valuations are going to reflect the risk that investors are willing to take. I’d expect valuations to drop a little bit. Investors will take more ownership to compensate for those risks.

Kelly: But the risk threshold isn’t the end of the world.

“While declining VC activity and valuations are unsettling, it’s important to know that there are great companies that emerge from recessions.”

Many tech unicorns were founded between 2007 and 2009. Plus, over half of the current Fortune 500 companies were founded during a bear market or a recession. Right after the crisis in 2008, VC funding was increasing 25% YoY.

So there’s hope.

3. What strategies should founders use when approaching investors now?

Gabby: It depends on where you are in your fundraising cycle — whether you’re fundraising now or planning on fundraising in a couple of months.

If you’re planning on fundraising, but haven’t started yet:

• Build informal relationships with investors. Spend time knowing the 10 to 12 investors whose backgrounds you like, invest in your sector, and invested in similar companies at your stage.
• Make your engagements meaningful. You could ask investors for advice on your pitch deck or maybe learn more about their firm and process. Once you get to that fundraising step, you’ll know what to expect and be able to expedite the process.

If you’re currently fundraising:

For those who are currently fundraising, just like Kelly mentioned, it can be an intimidating process if you’re new to it. But please, don’t be shy. This is your moment.

• Get warm intros: If you know folks who have already raised VC funding or have investors in your network, you can ask them for warm introductions. This can be with other investors that you’re interested in talking to, even just to get feedback.
• Send cold emails or LinkedIn messages. We get a ton of cold outreach and we welcome that kind of engagement. A couple of our portfolio companies right now actually came in through LinkedIn and cold emails. We believe that there are some incredible opportunities with founders who are outside our networks. More firms are embracing that too.
• Be clear and concise in your communication. Include a quick summary of your business, the problem you’re solving, and how you’re doing it — your vision. You also want to include revenue projections and key performance indicators that show your growth trajectory. And then also add the topline details about your raise: how much, other participating investors, how much is left that you’re looking to raise, and your valuation.

Take a look at our pitch deck template to get a feel for what investors are looking for.

“Don’t write off folks who don’t invest in you today. It could be for a number of reasons that don’t have anything to do with your particular business. Don’t give up.”

Kelly: Also, remember that angels are still active. If you’re looking at angel syndicates or angel groups, they probably already have funds set aside to deploy, which means they’re ready to go.

I recently talked to a founder who was able to round out a deal really quickly with all angels. So it’s possible. You just need to find the right ones.

4. How should founders prepare for pitching?

Gabby: Have your story down. That’s so essential.

Investors are investing in you and your vision. How you share and articulate that story is going to be critically important to getting through the due diligence process.

Before you approach investors, make sure you have the following things down:

• Your pitch deck: Investors want to know what led to you starting the business and your belief in the market. You’ll understand that problem deeper and better than investors will at the start, so you need to show them what you see.
• Insights from beta users or customers that show initial traction: These key insights are really important at the earliest stage. If you don’t have customers yet, share research.
• A clear data package: In addition to your deck, investors want to see your data room. That includes your financial model, historical or future predictions, and what your customer pipeline will look like if you have existing customers. Really, you want to share anything that shows forward-looking growth or traction.
• People who can advocate for you and your business: This can include customers, people you met at an accelerator program, past investors, that sort of thing.
• Other basic information: This includes your valuation and how much you’re raising. We think it’s good for founders to set their own valuation because it gives us a starting point.

5. How should founders keep investors excited?

Gabby: I like to think about venture capital from a game theory perspective. You can categorize it like a repeated game, meaning your investor interactions will compound as you go along the raising process.

To keep founders excited, continue sharing your progress. So if your KPIs are skyrocketing or you’re getting more traction, share those points weekly, in quarterly updates, or through email updates. Say, “Hey, we just landed this customer,” or “I wanted to share that update.” Investors appreciate seeing that over time.

And keep building strong relationships. If you’ve reached out to investors in the past and they passed, take their feedback to heart. If they don’t give it, ask.

That way, you can come back and say, “Hey, here are some of the things I worked on that were concerns before. Let’s restart that conversation since I’m now in a different place.”

“You want investors to see you get better, and you want to stay top of mind.”

6. Should you consider a bridge or seed extension now? If not, how should you extend your runway?

Kelly: If you don’t have 24 months of runway, a bridge or seed extension might be worth it to ensure that you can sustain your business.

You want to make sure your fundraise is tied to a specific goal or benchmark for your business. For example, one of our portfolio companies, Aunt Flow, provides period products for schools and businesses. Now, they’re manufacturing PPE.

“Be agile and think of creative ways to bring in more revenue, given the expertise you already have.”

A few other things you should consider before seeking more funding.

• Try to get paid upfront, especially if you’re a B2B startup.
• Get creative with your acquisition strategies. One of our portfolios is offering free trials, which is helping improve their pipeline, and getting more people to use their product.
• Cut expenses. This can include rent, marketing and ad spend, SaaS subscriptions, and the scope of your retainer services.
• Reevaluate headcount. This is the last thing you want to do. If you have to do it, talk to your employment counsel first. You can also try to cut spend here in other ways before turning to layoffs. For instance, one CEO cut their salary and had others agree to do the same so they wouldn’t have to lay off anyone. You can also reduce 401(k) matches, bonuses, and other benefits.

If you have to lay off or furlough the team, find ways to support them. Make intros to other businesses, and let your investors know what’s happening because they can also help give your employees soft landings.

Venture debt financing is another option, but only consider it if you’re cash flow positive. Be careful if you go down that path.

7. What do you want founders to remember during this crisis?

Gabby: It’s scary to reach out to investors, but you should still do it.

“You have a lot of champions, even if you might not realize it.”

At Harlem Capital, we want to support and uplift folks across the ecosystem. Investors can’t invest in every company — we only invest in 1% of all the companies we get to see. Even so, we’re still your champions, and we will help you.

We want your business to be resilient through this period and afterwards.

Kelly: Echoing what Gabby said, find your support network, and don’t be afraid to reach out and build relationships even if you’re not looking for investments. The people you meet could end up being great mentors.

I know everybody on the Harlem Capital team is eager to support you. We’re here for you.

“Stay positive and keep your eyes on the future.”