Startup Fundraising in Foggy Markets
I was recently in Norway, with great hospitality from the folks at Norselab, StartupLab, Finstart, DNB NXT, and several ambitious startup founders. Visiting Norway pretty much requires a trip to the mountains, so I was fortunate to spend a bit of weekend time hiking and getting some very fresh mountain air.
Everything was fantastic…
…except the fog…
…which is like the current fundraising environment for startups.
It’s evident that a bunch of companies were funded with too much money during the past few years and with public markets becoming increasingly discerning, the knock-on effect on private market fundraising has likely already started.
Of course, all of this will take time to show up in the official data, which is anyways backwards looking, and in the meantime startups will have to fundraise in foggy markets.
There’s no detailed map for navigating the fog, but there are some rough guidelines which can help startups find some clarity.
1. Everything is slower
Fundraising that used to take 2 days will extend to 2 weeks. Fundraising that used to take 2 weeks will extend to 2 months. Fundraising that used to take 2 months — well, let’s just say it will take longer.
Expect this difference and plan your time allocation, cash resources, and spending based on these longer timelines.
If you have not done so already, review the payment terms you have with customers and suppliers. Finding more cashflow from your working capital cycle can both extend your short-term runway and can even be a long-term source of cashflow.
2. More deals will break at the last minute
Broken deals suck. In good times, they don’t happen very often and so they are a rare event. During foggy times, they are much more common. Investors are more likely to bring up issues during the due diligence phase as justification to re-negotiate terms or simply walk away. There will also be cases where investors simply don’t have the money that they thought — for example when an investor defaults on their capital call.
Always have a contingency plan for what you will do in case a deal breaks at the last minute. Communicate with your existing investors regularly so that you know their situation early in the process.
At the same time, during the due diligence process of any deal, expect there to be more negotiation. When it comes to term sheets and other initial agreements, ensure that there are specific points which do allow room for negotiation at the last minute.
3. The bar is higher and the valuation benchmarks are lower
It’s no secret that the bar for raising a Series A and a Series B has been increasing the past few years. This trend will continue, and of course it will vary by each segment and area. Yes the word is out that there’s a difference between high margin and low margin business models, but even if you have a high margin business you will find that expectations are still rising.
Investors will also likely start to discount recent valuation benchmarks. While this will feel negative, it is actually better than being a company who raised at an inflated valuation, is struggling with traction, and will only have the option of a massive down round soon.
Expect a high bar on metrics and understand that valuations may adjust based on changes in the external backdrop.
4. Be more capital efficient
Some investors, like ourselves, always value capital efficiency because we believe that great companies are built through a cycle.
But the reality is that capital efficiency goes in and out of fashion depending on where we are in the market cycle. Although it was out of fashion during the past few years, it’s quickly making a comeback. In this foggy environment, investors put more emphasis on spending effectiveness and team productivity. Being able to demonstrate capital efficiency helps fundraising during foggy times.
Look for ways to be more capital efficient. This does not mean necessarily spending less money, though it does mean getting more value for the money you spend.
5. Take advantage of the confusion
Sometimes you have to shake the trees to see the new light. If your startup is in the fortunate position of having a solid foundation, a foggy backdrop is actually an exciting time to uncover new opportunities.
Why? Because talent is easier to get, operating costs are lower, and marketing channels have less noise. As competitive dynamics change, investors want to back the companies who will emerge as clear winners from the downturn.
Start reviewing the opportunities which may open up because of the confusion created by the fog. Identify top talent who are unhappy at struggling companies. Pitch customers who are now being ignored by your competitors. Build new partnerships with suppliers and channels.
After the fog
Startup fundraising is always a challenge, but the difficulty level increases significantly during foggy markets.
Make sure to adjust your strategy for this different backdrop, including fundraising. Despite the challenges, the good news is that these foggy times are also an opportunity to set up for future days when the skies clear up once again.
