Realistic Deal Process With Investors
Just because you’re reading this article, you’re probably in the middle of a fundraising process. You may realize that the process has changed in 2022. While European VC dealmaking remains resilient despite harsher market condition, the global VC deals have changed. And the change will continue at least until spring 2023. This is important to know since a realistic view on the deal process and the environment investors are in, will affect your startup financing. Here are the factors and a realistic timeline for your fundraising process.
Please consider that startups equity story varies. While one pre-seed startup has early traction and sales KPIs, the other one works in a capital-intense market and their working beta focuses on solving a workflow problem but not eying revenue. Yes, despite what others say, the word ‘traction’ is not equal in all verticals.
A realistic deal process depends on many factors. However, these four are important to understand:
- Investment Environment
- Vertical of the startup (the market)
- Equity Story
- Experience in Fundraising
Let’s do a deep dive how the investment environment is currently changing:
Markets Enter Correction Territory
This investment downturn will be bigger and last much likely longer than other smaller downturns in the past ten years. Two examples: While Y Combinator told its portfolio companies to “plan for the worst.”, Sequoia Capital address this as a “crucible moment” in a presentation to their portfolio companies. The firm said “the cost of capital has fundamentally increased.” It also noted that crossover funds active in funding private companies are significantly impacted and “are tending to wounds in their public portfolios, which have been hit hard.”
In other words: Be prepared for a stronger correction and adjust your fundraising process accordingly. Especially in terms of valuating your startup, how you define KPIs and how you later allocate the money.
To put the changing territory in context (according to Pitchbook data):
- European startups raised €54.4 billion in 2022’s first half. This is on the same level as it was in 2021. It’s worth knowing that some deals announced between January and May 2022 were closed in the fourth quarter last year. That means it’ll take a little longer for changes to be realized.
- Nevertheless, according to Pitchbook data, the second quarter of 2022 already registered a decline of 10.6% in capital invested over the first quarter of 2022. And this is bad news. It looks like the correction is fully kicking in. I’m expecting a slightly stronger decline over the rest of 2022.
- Late-stage deals took the largest share of capital, with 66.3% of the total value. This leads to the conclusion that investors are focusing on quality startup investments vs riskier ones.
- Exits fell significantly from 2021’s record, with 657 completed worth a combined €25.8 billion. This is important since investors make money by selling their portfolio companies. This might happen through an IPO, an acquihire or selling the startup to another company. Once this process slows down, the funds get dramatically more careful about their investments.
- In contrast, there are more funds created in 2021 and the funds are hording cash. Nevertheless, I predict that the number of newly created funds will fall to its lowest level since 2013 (while fund sizes push the total value up).
It’s likely these general numbers will continue trending downward for at least 2022 and maybe even the first half of 2023, but perhaps not consistently for every active investor.
Overall, the private funding markets are beginning to adjust to the reality that this is not a blip. It’s rather a more sustained revaluing of public technology companies. And startups are in need to adjust their realistic deal process while going on a probably slightly longer and different fundraising journey.
A Realistic Deal Process
The process of sending a deck, getting a quick yes or no will come to a halt. Now it’s time to get more realistic while considering the other side — the investors. This is how the process typically goes and how you should adjust:
After you’ve been sending your first deck — a 5–8 pages long pitch deck that describes the problem, solution, market, business model and team, you’ll find yourself preparing a first investor meeting in a new deal-process reality.
Once you’ve sent your deck, the investors will reply with a first meeting proposal. BEfore entering the meeting, make sure, you’re doing you own due diligence about the investor (put the findings into an Excel sheet):
- numbers of deals and deal sizes
- investment verticals
- size of the fund and remaining fund size
If you don’t find these numbers, please ask the investor directly. It is important to know these facts to understand whether the investor can invest as lead or do a follow-up investment out of the actual fund.
Now let’s deep dive into the first step of your investment journey, the First Meeting with an investor.
Here’s a little bonus: In 2021 I collected a list of Angel investors in the New York area. The list is not finally verified. Some data results from another list I received from my friend Bonnie (I recommend her SOS Startup newsletter). Download the Excel file here.
I know how time consuming it is to research actual investors. However, you‘ve got to do your homework and do the same anyways. I’d advise you to not skip your very own research. Nevertheless, I hope this list is helpful for a first start.
-8 Days: First Meeting Date is set, look at your Product Demo
After getting your first meeting date, immediately start with due diligence. Follow all the fund’s partners and supporter on Linkedin and Twitter to get your startup’s name on their mind and understand their thinking.
Worth to mention: According to the timeline graphic above, talk to your team about your product demo. Eight days are sufficient to change the demo.
-7 Days: Talk to Portfolio Startups
If not already done, try to talk to some of the fund’s portolio startups. Ask about the process and how reliable the investor is. Try to understand what made the investor invest in them. Ask how the investor deals iwth the current market situation. Don’t be shy!
-5 Days: Get your KPIs in Order, test your Valuation
Now it’s time to upgrade your deck with the knowledge you’ve gained from doing the due diligence.
Let’s assume your general pitch deck is in a good shape, add the latest KPIs and marketing tactics to acquire customers to the deck.
I assume your KPIs are likely not as they should be. So check and test your valuation before going on a call with an investor. This is especially for capital-intense fintech startups.
-4 Days: Arrange New Calls with other Investors
Nothing is more important to have more potential investors in your pipeline. Why? Simply because 7 out of 10 investors will ask who else you’re talking to. While you don’t name them, you’ll need the confidence after every investor call, there need to be at least 2–3 additional calls scheduled.
-3 Days: Check The Competition
…because this is something the investor will do at least on the same day.
Look at your competitors from different perspectives. It wouldn’t hurt if you start an Excel file, a deck or Miro board about the competition.
-2 Days: Simplify your Deck, know what you don’t know
Every pitch deck is just as good as your story. Always consider that the deck just accompanies your personal pitch.
Then start with making notes about the things you don’t know. Especially in a pre-seed stage, it’s important for an investor to know about the unknowns
Investor Call/Meeting: Stabilize your Mindset
Be open to criticism, rather calculate with a ‘no’, get yourself into a “learning” mindset, be open to advice.
Apropos advice, please consider that investors rather give you advice then talking about your valuation or an investment: If the ‘investor’s advice’ comes into play, an investor probably won’t invest.
Now it’s time to collect every advice you can get. So go and ask what was unclear, what kind of doubts they have and how it’s the best way to keep them updated. Consider every contact with an investor as a journey.
Since 59 out of 60 investors calls/meetings will end with a ’No’, I found it more important to prepare you with the a realistic process than with an optimism that probably won’t pay out.
If you want to deep dive into a Realistic Startup Fundraising Timeline, here’s my evergreen article that gets hundreds of readers every week. I’m also continuously updating my evergreen posts on Medium.com.
About the author:
Steve Nitzschner is the founder, CEO and Head of Investments at Wildstyle Network. The Berlin, Dresden, Brooklyn and Shanghai based digital creative agency has invested in more than 20 early and pre-Seed stage startups across the globe. Steve has been a Google Launchpad mentor and has accompanied over a dozen startups for Google. Being the chairman of the AI IN AUTOMOTIVE conference, Steve has digital entrepreneurship knowledge in #fintech, #robotics, #ecommerce, #socialimpact, #internettechnology. Read more here: https://www.wildstyle-network.com/angels-and-startups
