Fundraising In A Down Market Is Doable, Even Now

Co-Founder and Chief Strategy Officer at IRALOGIX, overseeing product-market fit and corporate development initiatives.

It probably doesn’t need to be said, but to state the obvious, Covid-19 brought a lot of things to a screeching halt. Among those things was the large flow of venture capital into the early stage market. As VCs were working to shore up their current portfolio companies, new deal flow either ceased or slowed tremendously. Here’s the good news: The world is moving forward. This downturn wasn’t caused by an endemic problem in the financial markets, and VCs don’t get bonus points for holding onto cash. They need to deploy capital and generate a return in order to remain in business themselves. So how do you improve your odds of finding a new partner in this environment?

First, one must acknowledge that raising capital in any market is difficult. Most who try won’t succeed. If you have, congrats. You’re already a one-percenter — closer to a 0.5-percenter, in my experience. That is a big accomplishment. Additionally, as a technology entrepreneur and executive with expertise in early and growth-stage companies, this downturn is different from any I’ve seen in the last several decades. Certain market segments just are not going to get many new investments for the foreseeable future. If you are in those spaces, manage what you have tightly, and try to make it through. Unfortunately, a lot of businesses may fail that would otherwise have succeeded due to no fault of their own; it’s just really bad luck.

Those qualifiers aside, how do you make yourself stand out today?

1. Acknowledge that things have changed. This doesn’t mean you should pay lip service to it in your pitch. That probably won’t survive diligence. Demonstrate it in your actions and models. Focus on the things that will drive real value to the business now. Assume the worst, and plan for the best.

2. Sharpen your value proposition relative to the post-Covid-19 world. What might have been a solid, relatively unsexy business to some in January may be extremely investable at the moment. Be able to say why that is in plain words.

3. Right-size your ask. Approach the raise as if it is going to be the only capital you will be able to raise for at least 24 months. At the same time, the raise should be sufficient to give you enough dry powder to accelerate if your business does. (Some are doing very well in this environment.) The raise should also give you sufficient runway should things be delayed for any reason and also demonstrate a reasonable path to a positive cash flow. That last one may not be possible for your particular business and stage. It is also not necessarily plan A for those backing you. But if you can demonstrate the ability to achieve it if you need to, you will be that much more interesting. Doing this well helps affirm points one and two in the eyes of the investor. The “growth at all cost” cycle will likely return — but not this year.

There are also a couple of basic things that can help you in any market, but they are particularly helpful now. Make a habit of them to increase your odds.

1. Always be raising. Early stage fundraising is a combination of science, art and relationships. After establishing that a VC has interest in the business, learn your VC’s point of entry, and then keep them posted as material things happen. Four to six thoughtful email updates per year can keep you front of mind, give them validation points along the way and create opportunities to build a relationship. If you just closed a seed round, be talking to Series A and B investors about your plans and progress. This does take effort as your base of followers grows but is definitely worth it. If you had been doing this for the past two or three years, you could currently have warm relationships in a down market.

2. Prioritize clean terms over valuation. The only thing better than a high valuation is a higher one, right? Not exactly. Learn and understand the investment metrics that professionals need to make at each stage and align, your raise with them. If you are talking to an investor who needs a 10% stake and what you are offering will give them 5%, one of three things will typically happen: They will pass, offer at the valuation that makes their math work or add in terms that have the same effect. Once those are in there, they are in there forever. The next investor probably won’t take worse terms. In general, messy terms make deals harder to do. You don’t need anything else stacked against you at the moment.

Understand that valuation is a hot button for everyone, and keep the big picture in perspective. The cause of this downturn is a virus — an external factor. These types of disruptions can bring a lot more unknowns with them. While things are becoming clearer in some market segments, they remain completely dark in others. People’s perception of risk is a function of price. If you find yourself in the position of fielding an offer but it is flat or down from your last valuation, you will likely have some internal strife within your organization. Remind yourself and your team that if you’ve aligned yourself with a good financial partner, their value reaches beyond money. The cost of doing nothing can be way higher, and the only valuation that really matters is the final one.

The margin between success and failure in many pursuits is often one or two little things going your way, and you don’t know ahead of time what they may be. Fundraising is no different. Take every advantage you can get, and don’t waste an opportunity to create one. Good luck, and stay safe.

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