Fundraising Blues in 2016?

By Bilal Zuberi, PhD

2016 began with a string of bad news related to the economy. From China’ economy to Twitter stock — it has certainly sent ripples through the early stage investment ecosystem that there me the opposite of easing happening in the venture world. People are gently referring to it as: the bubble is popping, or reality may be setting in, or this is the new normal etc. Never mind the positives associated with low cost of oil or that the Fed thinks economy is doing well enough that they should start increasing interest rates.

Putting aside the mumbo-jumbo you might hear about macroeconomics, fact is that many entrepreneurs are concerned, and asking for advice on the fundraising environment for early stage companies (companies raising Series A or Series B) and trying to devise strategies for when and how to raise their next round of financing.

Here is generally what I am telling them:

• Great companies are getting funded at all stages. Entrepreneurs don’t stop building great companies and investors don’t stop investing. There are several significant funds that have re-fueled in the last year, and some others who are in the middle of a raise now. The point of raising capital is to deploy it. And when/where others are not looking is often where great opportunities are found. That’s what Lux does and we are among the funds that have a fresh pool of capital to invest across early stage rounds in breakthrough tech.
• A lot of noise will be made by those smelling blood regarding companies that are already sitting on ridiculously high valuations. While some of the woes around later stage growth equity rounds are real, some are being fed by competition just to hit back below the belt. Companies likely to get most bad press will be those who actively sought attention when they were raising funds at ever-increasing valuations.
• Investors are certainly more cautious right now at the beginning of the year given the string of bad financial news, but there is really no way of knowing (as yet) what all this means for the long term. Most early stage investors know as much about economics as your average college physics professor — so VC partnerships across the country are in a little bit of wait and watch mode. They are doing portfolio analyses, trying to understand what reserves they may need for existing portfolio companies, and what their own fundraising prospects might look like for the next few years. In the meantime, they will continue to pile $$ on companies that are being chased by other well-known investors (nobody looks idiotic competing aggressively with top tier funds), and will likely move cautiously on companies where they will need to build internal conviction from first principles.
• If you are not a company with momentum, or don’t really need to raise, my guess is raising money in Jan-Feb 2016 might be a bit more of a distraction for you than worth it. Perhaps let the market sort itself out a bit and then go out to raise when people are less likely to be checking twitter stock ticker at the end of every day. Take this time to plan, figure out who you would talk to in what order, tighten your metrics, and pressure test your pitch with your existing investors/advisors.
• Be deliberate about your operating plans and strategies for 2016. Make sure you understand well what are key metrics that investors will be looking for in terms of traction, and what are most valuable value-inflecting milestones for your business. No, hype in tech-media is not a good metric
• Don’t let your organization stretch too thin across to many offerings and features, and for heaven’s sakes don’t project revenue and earnings targets you cannot meet. Don’t surprise your Board half way through the year that your 12-month runway is actually just 7 months.
• Plan fundraising process to take at least 3–4 months, and in fact more likely 6 months (from first conversations to close). This is radically different than the last few years when some people were wiring money without even signing the paperwork. Suddenly VCs have discovered that they should pay more attention to the advice lawyers are giving on nitty gritty details of protective provisions etc.
• If you get inbound interest, don’t toil away the opportunity. Don’t be ‘cute’ with financings or try to optimize on all kinds of things at once. This is an example of where keeping conversations open with other investors helps (i.e. even when you are not fundraising) — you can quickly spin other potential investors up and run a quick process should you choose to.
• Last but not the least, it is not just the VCs and CEOs who are concerned about the fundraising environment. I would think many employees in startups are likely also paying attention to this, and making judgements about their own situations. CEOs should be transparent to their teams, build confidence in their teams, and boost their morale. A strong, impressive, executing team is the first and most important reason why VCs invest in a company.

Happy fundraising!