Fundraising in a Tough Environment

Lately, the startup headlines have focused on the tough fundraising environment. What is a startup founder to do when their startup is reliant on investor cash to advance?

One of the advantages of building investor-funded startups for over twenty years is an experienced perspective on fundraising under different economic conditions. I am not here to tell you that the broader economic conditions, stock market gyrations, and unnerving shocks do not matter. They do. Yet, there are a few things to be aware of when you come face-to-face with such out-of-your-control happenings in the broader environment around your startup:

• Never forget that there are always nuances. Every startup is unique, and how the more general environment affects YOUR startup depends on what your startup is doing specifically, how far along you are in hitting your milestones, how much money you have in the bank, how high your burn rate is, who your investors are and what reserves they have, and a whole host of other factors. First and foremost, be aware of what is happening in the broader environment, and then focus on WHAT YOU CAN CONTROL. You cannot control the stock market, but you can control how fast you spend what cash you have. You cannot control the Fed’s interest rate changes, but you can control what you focus your limited resources on. You cannot prevent systemic shocks or industry crises, but you can control keeping your eyes on what your present or future customers’ needs are.
  
  
• Economic conditions that hurt financial asset values create tougher fundraising environments. The most straightforward example of this is a falling stock market. Angel investors are, by definition, high-net-worth accredited investors who typically keep a big chunk of their wealth in the stock market. When the stock market falls, they objectively have less money to invest and often will pause their pace of investing, affecting both new and possibly follow-on investments. Raising money from individual investors is more challenging when they feel relatively “poor.” This factor affects VCs less because they typically invest from a fund they have already raised. While the tough fundraising environment may affect them when THEY go out to raise the next round from institutional investors (who are affected by the stock market) as well as accredited investors, they will tend to be a bit insulated from stock market gyrations by the long cycles of their VC funds. I did, however, use the word “less” because VCs will be aware that a tougher fundraising environment may compromise the weaker companies in their portfolio. They may have to make tough decisions about which companies to support if they perceive a need to deploy their funds more carefully, and they will certainly prioritize their existing portfolio companies over new deals if they have limited capital to deploy. For startup leaders, you must keep focused on building the best possible fundraising story you can and know that getting to yes may be harder than before.
  
  
• Big dramatic events can cause a “freeze” reaction amongst investors. By a big dramatic event, I mean something like the planes taking down the Twin Towers in New York on 9/11 or the stunning emergency of the COVID-19 pandemic. I lived through those dramatic events while at the helm of a startup, and I remember that everyone seemed to freeze for a moment. Investors, startup leaders, customers. There was this impression of deer raising their heads in alarm and looking for the danger. People closing funding rounds suddenly discovered their close collapsed, or investors hit the pause button. When COVID first struck, there were many conversations about what it might mean and how it might affect our startup. In my case, we made an abrupt move to become entirely virtual and then put our heads down and kept at our day-to-day product development because we were fortunate to be well-funded at that moment and could ride out the storm of uncertainty. Others less well-funded had to take more drastic steps to extend their runways. Perhaps the only good thing about significant dramatic events is that the “freeze” typically passes relatively quickly (months instead of years) as everyone assimilates the uncertainty, overcomes the fear response, and begins acting again. A temporary adjustment to lower burn and more caution can often carry you through. But do not fail to recognize that an adjustment is likely needed because of the ripple effects of many people freezing at once. The thaw will probably be uneven, and you want to be as prepared as possible.
  
  
• Recognize that investors are people, and their judgments are affected by things that raise their perception of uncertainty and risk. News articles trumpeting the threat of a recession, banking turmoil ranging from relatively contained Silicon Valley Bank crises to the drama of 2008, and industry-specific drama like the stress COVID placed on the healthcare industry all raise investor perceptions of risk. And investors have some predictable reactions to higher risk, including: (a) vetting potential investment opportunities more rigorously in an attempt to take less company risk in a higher-risk investment environment, (b) lowering valuations because there is less competition for good deals and it improves their ultimate chances of a good investment outcome, and (c) structuring their investments more conservatively. You can live with all that if you keep your eye on the ultimate prize of getting the cash you need to build a great business. The details of the terms often get swamped by the benefits of a good exit!

Challenging fundraising environments are never fun, but tough does not mean impossible. Investors who have funds to deploy are still looking for good opportunities, the competition is often less because weaker companies or less prepared founders will bail, and there will be a stronger focus on business fundamentals like working towards positive cash flow rather than taking the risk of growth at all costs. This means that startups that can build strong businesses and weather harsh fundraising environments often emerge with better products, more resilient and focused teams, and possibly even better investor returns as the intensity of forging generates better results. So, while you may have to hunt harder to find investors ready to take advantage of tough times, you can succeed by being careful with your cash, sustaining your focus, and building a fundamentally great business.