Fundraising lessons from 2023/24 + a chat with Ken Thomas (VC)

With the first quarter of 2024 now coming to a close and the dust settling on 2023, we sat down to look back at what’s changed, and valuable lessons have emerged from the experiences of startups seeking capital and venture capitalists providing funding. This article explores the 5 key lessons learned by founders and investors and their implications for shaping successful fundraising strategies in 2024.

I sat down with Ken Thomas, commercial operator turned investor, to help compose this report and share his insights. Ken’s professional journey began in the financial sector in New York City, but a move to London during the pandemic marked his entry into the world of startups. Ken specialises in supporting and investing in B2B SaaS businesses. Beyond this, he actively mentors and guides startups of all kinds.

Lesson 1: Patience is a Virtue — Due Diligence Takes Time:

A standout lesson from the past 12 months is preparing for an extended due diligence process. Investors approach investments with increased caution, resulting in a more meticulous examination of startups. Entrepreneurs must showcase patience, prepare comprehensive documentation, and foster transparent communication to expedite the due diligence phase. The difference in due diligence processes now, 3–9 months, compared to 2021, 3–6 months, is stark. Start-ups are encouraged to ensure that their next few months of potential revenue are aligned with their current pipeline to ensure milestones are met. It is always better to overperform your short-term projections rather than miss them completely.

Karan C: Why do you think due diligence is taking longer than previous years?

Ken T: By the numbers, I think we’re seeing more accountability on investors in their DD processes. Deals are down by over 50% from 2023 to 2021; this can’t just be about the quality of companies — the perspective has shifted.

I think it shows what companies had achieved real product market fit, and were not a ZIRP-era phenomenon. The bar has become much higher, which I see as a good thing, especially as I imagine we’ll have a plethora of builders coming out of the woodwork in 2024.

Lesson 2: Extend Your Financial Runway — Aim for an 18-Month Cash Runway:

In response to economic uncertainties, startups are reevaluating their financial strategies with a focus on cash management. Investors favour startups with financial buffers, highlighting the importance of planning for at least an 18-month runway. This extended runway instils confidence in investors that a start-up has a strong business plan. This extended runway allows startups to remain agile and focus on sustainable growth.

KC: Why are VC’s looking for companies to extend their cash runway?

KT: I don’t think it’s just runway extension; it’s also a bit about efficiency. I think with the number of extension rounds we see at the end of 2023, missed targets and market conditions came together in a nasty way. I believe now we’d want to be sure that a company is well positioned to succeed.

Additionally, companies needed to be more efficient on growth and burn, but hindsight is 2020!

Lesson 3: Keep It Lean — Low Operating Costs Matter:

The last 12 months underscore the importance of operating efficiency and cost-effectiveness. Investors are scrutinising the financial prudence of startups, preferring those that demonstrate commitment to low operating costs. Entrepreneurs can optimise resources, explore cost-sharing initiatives, and leverage technology to streamline operations. This demonstrates a frugal and lean approach that attracts investors and positions startups for long-term viability.

KC: What is the importance of team composition for you?

KT: At our stage, I think being lean is the best scenario. For starters, as things get larger, more bureaucracy emerges, leading to longer processing times.

This isn’t to say teams that aren’t lean can’t succeed. However, there is something to be said for clear leadership and bottom-up hiring versus hiring those pivotal leadership roles early in the life of a company.

Lesson 4: Traction Speaks Louder than Promises — Showcase Strong Metrics:

In the competitive fundraising landscape, startups recognise the importance of showcasing tangible results. Investors now place a premium on strong traction metrics, emphasising user growth, revenue generation, and market share. Entrepreneurs have learned that a compelling narrative backed by robust data and key performance indicators (KPIs) significantly enhances their fundraising prospects. Startups with proven traction are finding themselves in a more favourable position during investment negotiations.

KC: How important are metrics? Do you expect companies to hit their targets during the due diligence period? If they don’t, does that affect your valuation, or do you take the current market into account?

KT: At the pre-seed stage, I think company metrics take a backseat to certain other things. I think that Europe holds too much of a precedent at the pre-seed stage. I’d be focusing more on the team, market potential, what current customers are saying, and how they are engaging.

At seed, it could be more cut-and-dry when looking at metrics and whether they’re moving in the right direction. So, at seed, I’d bring metrics more into the fold of the due diligence.

In terms of market-based pricing, recent history has told us how fickle of a benchmark that can be. I try to think of the next round when looking at current prices and valuations: (1) would this be a hindrance to the company in the next raise?; (2) does this put us in a position to create value between now and then?

In Q4’23, I think we saw some interesting prices and valuations pop up in the market. There will always be outliers, but always worth asking yourself if it makes sense.

Lesson 5: Capital Efficiency Matters — Optimise Resource Utilisation:

The focus on capital efficiency is a critical addition to the lessons learned in 2023. Investors are increasingly valuing startups that demonstrate effective and prudent use of capital. Entrepreneurs are learning to optimise resource utilisation, prioritise high-impact initiatives, and strategically allocate funds to maximise returns. Startups that exhibit good capital efficiency attract investment and position themselves as financially responsible and sustainable ventures.

KC: How important is capital efficiency to you?

KT: As someone who has been in a place where capital could have been managed a bit better, I look at this pretty intently. Not to mention what we’ve seen play out in the larger market.

When speaking with companies who are raising, I always ask where the money is going. I don’t think a pre-seed company should spend all that much on marketing, if at all. Does that company need to hire that shiny leadership role at the seed stage, or is it better to hire SDRs to fill up the pipeline for the founders to sell?

I think overall, people are being more sensible about capital management these days, so that box is checked in many cases.

Bonus question: Interest rates and LP’s

KC: How have interest rates affected you when thinking about fundraising from a VC perspective?

KT: From what I’ve seen, LPs seemed to be a bit more hesitant on commitments in the past year, for good reason, I’d say.

That being said, I think we have a pretty strong offering that has translated very well in our first year of fundraising, allowing us to commit to and complete 4 deals in the first year of the fund.

I believe, like most emerging managers this year, we would have been much further along in a different rate environment. I also believe we’re in a great vintage period, as we’re meeting higher bars for the commitments we’re receiving!

Conclusion

As startups navigate the fundraising landscape in 2024, the lessons learned shape a new paradigm for entrepreneurial success. Entrepreneurs are adapting and refining their strategies, from cultivating patience in due diligence to extending financial runways, keeping operations lean, showcasing traction, and emphasising capital efficiency. By incorporating these lessons into their fundraising approaches, startups can not only navigate the challenges of the current landscape but also pave the way for sustainable growth and success in the years ahead.

Are you a founder raising institutional funding? Head over to our fundraising resources page, list of active angel networks or get in touch with a team member here!

Do reach out on LinkedIn and comment below if you believe I’ve missed anything!

Or… feel free to hype me up like Stilgar…