How to fundraise in a crash?
Updated: Aug 24, 2022
The crash is here. The VC ecosystem is taking a battering and most economists believe we are heading for (if not already in) a global recession.
Early stage startups and scale ups looking to raise funds will need to alter their approach from the fundraising playbook before the crash.
I had the opportunity to attend an insightful panel discussion titled 'How to fundraise in a crash" at London Tech Week yesterday. The panel included partners from renowned VCs across Europe and North America:
Benjamin Joffe - Partner at SOSV, Michael Smith - General Partner at regeneration.vc Andreea Constantinescu - Partner at Planet First ventures Kimberly Zou - Co-Founder at Climate TechVC
The discussion was centered around climate tech, but there were key takeaways that are applicable across industries.
In this article, I summarise the major learnings from the discussion:
Go with an aligned strategy on how you think about capital
Do your due diligence. If you're trying to get a better deal, understand the market. Be mindful of potential negative signals if you’re not coming from a place of strength.
Be disciplined in how you manage and plan for spending
Be very specific about how you’re going to calibrate your spending in order to optimise ROI in case you raise a round. The last thing a proactive investor wants to see is a founder unsure about how they plan to utilize additional funds.
Be transparent
Ensure you highlight which areas of your business could be at risk incase of further economic downturn. It helps to keep investors abreast of risks within your business to build trustworthy relations.
Keep an open mind
Look out for investors that offer creative valuation structures. Investors are looking at structures that enable them to invest at an acceptable valuation keeping in mind the recessionary environment.
But remember many of them have your best interests in mind and are looking at ways to ensure management teams and existing shareholders are able capture back value if the situation improves quicker than expected.
If you’re at a position of strength, consider uncapped notes with future potential
Some companies aren’t doing new rounds and instead leveraging existing investor notes to raise more cash.
Target suitable investors
Many startup founders end up wasting a lot of time talking to investors who are not really the right fit. This might seem like an obvious suggestion, but many founders fail to follow through with it. You end up wasting a lot of time on investors who are very likely to say no. Do your background research on the VCs, their portfolio and historical funding figures.
Investors are now very mindful of the milestones they prioritise
Figure out what milestones investors are looking at since the crash and ensure you have a clear breakdown of all the metrics pertaining to those milestones. To determine those milestones keep in mind the stage your company is in, the industry you operate in and the kind of investors you are talking to.
Be wary of pivots if you’re not in a financial position to make them easily
It’s paramount that you base any potential pivot on the insights generated from the first phase of your business. Be clear with your messaging while communicating the reasons behind your pivot - What were the various things we were doing? What worked best? Why do we intend to lean in on this option?
Having said that, be bold while evaluating any potential pivot. You don’t want to be wasting time on resources on an idea that may not get validated in the future.
Focus on motivated customers
In your pitch, highlight your plans to focus your efforts around clients that are more likely to drive growth in a recession. These are a set of extremely motivated employees who want your solution even if it's not ready and are even willing to pay for it. Avoid chasing customers who aren’t enthusiastic about your product at all costs.
Get a capable CFO on board
Ensure you get a good CFO on board who holds the reins of spending and holds everybody accountable. Having a good CFO reflects very well on investors
Leverage industrial relations
If you’re a capital intensive scale up, maintain good relations with your external suppliers and industry partners. Investors are buoyed by scaleups with strong industrial support. Highlight the unfair advantage you have because of their backing.
Strengthen relations with existing investors
Go back to your existing investors to try to get some extension on runway if possible. Remember your relationship with existing proactive investors is serious and long term. They can add tremendous value
The nature of your startup and the industry you operate in will determine to what extent you can follow the aforementioned guidelines. However, it would help to be mindful of these pointers and plan your investor reach outs accordingly.
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