Hard Fundraising Market Drivers

When fundraising, it is easy for startup leaders to focus intensely on their stories and arguments for why their startup is a great investment opportunity. While a cogent case must be built and delivered, exogenous factors often play a critical role in fundraising success and failure. 

Unfortunately, once a startup has been launched, tenaciously pursuing momentum and success is sometimes not enough. So much is outside of the startup’s control when it comes to fundraising and pausing while those exogenous factors unfold is typically just not an option. Nonetheless, being aware of outside factors that influence the fundraising market can provide critical insights that startup leaders can use to choose appropriate strategies to meet the moment.

Let’s review some common exogenous factors that are outside an individual startup’s control but still must be kept in mind when thinking about the overall fundraising marketplace:

• Investors are focused on and constrained by the recent behavior of the exit marketplace. When the IPO and M&A markets are in a state of drought, there is a ripple effect back through the fundraising marketplaces for earlier stages. Investor dollars are locked up in existing portfolio company investments, making investable dollars scarce. A lack of exits means that limited partners are not getting multiples of their capital returned, constraining them from investing in new funds. With less ability to raise new funds, VCs reach limits on how much capital they can deploy and face powerful incentives to support their existing investments in hoped-for future success stories rather than launching into new investments. Earlier-stage investors find that their portfolio companies cannot easily raise the next round, exacerbating the clogged flow of capital and returns through the system.   The bottom-line is all startups, even those at the earliest stages, are affected by the flow of capital through the system. To understand whether the broad fundraising market is hard or easy, start by paying attention to the ebbs and flows of the volume and multiples being found by exit-stage startups. There will always be exceptions, but when investors are commenting on a dearth of exits, talking about the XYZ industry drought, and delaying raising new funds, realize that means that the bar you must clear to raise money keeps rising the longer that goes on. In other words, that is what is called a hard fundraising market.
  
  
• Political uncertainty and turmoil stimulate investor caution. Even for startups who are pursuing opportunities that seem to be not particularly influenced by the political situation (and I am making this comment based on U.S. national politics which is often relevant just because of how enormous the U.S. economy and associated markets are), there is an increasing tendency as each election cycle approaches election day for investors to hesitate to close deals until the outcome of the election is known. This is, I believe, a function of a couple of combining factors. Usually, the leading candidates will have distinctly different economic plans, philosophies of government, and other priorities that will shape the market and competitive environment faced by the whole startup ecosystem. In a closely divided country, it is often hard to know with confidence which way the election will swing, including both presidential and congressional leaders, so investors will often take a conservative stance and delay even investments that they are bullish on to see what might happen to the overarching environment.
  
  
• National and international events like pandemics, wars, and macro energy prices all influence national economies, individual industries, and customer behavior. Sometimes, these mega-trends will create opportunities and tailwinds for startups that happen to be in the right place at the right time. Sometimes, these factors will create roadblocks, distractions, and attention competition, making fundraising harder for certain startup sectors. Remember that while these factors are often not directly connected to an individual startup’s opportunity landscape, they can create external pressures that influence their ability to fundraise nonetheless.

This is not a comprehensive list of every exogenous factor that can influence the fundraising environment for a startup, but, hopefully, it gives you an illustration of how such factors can shift fundraising dynamics. Over time, as in many financial marketplaces, there is often a swing back and forth between relatively hard and relatively easy money markets. “Easy” markets probably never will feel as “easy” as fundraising startup leaders might wish, however, the challenges and strategies in such markets are different. We will save comments on that for another time since this post is focused on “harder” fundraising markets where factors like those above make money tighter and less accessible.  

So, as a startup leader, what can you do when you are facing a hard fundraising market? As always, be aware of the bigger picture, but focus on what is within your control.

• Recognize that raising money may take longer than you hoped, so be sure to take smart actions to focus your investment of the precious investor dollars you do have on the highest impact risks and opportunities you can hit and do what you can to extend your runway. For example, If you have team members who are struggling to contribute, take action to trim your burn. Pursue the highest impact paths and prune away secondary priorities. Push for visible derisking progress and momentum builders in your product development and commercialization.
  
  
• Pay attention to risks in your environment and take proactive steps to address them when possible. If you are navigating difficult waters such as volatile events, political uncertainty, and other industry-specific difficulties, seek to be proactive in addressing emerging problems. For example, sometimes a change in presidential leadership will mean a massive shift in government spending priorities that may mean that non-dilutive funding sources you accessed previously are no longer available. Sometimes startling events like the 2008 stock market crash, the 9/11 attacks, or the emergence of the COVID-19 pandemic may require swift action to batten down the hatches and ride out the storm. Try, whenever possible, to maintain a financial reserve so that when the unexpected happens, you have resources to help you through a crisis. The fewer resources you have, the faster you must act and sometimes the more drastic actions you must take.
  
  
• Communicate closely with your existing investors. When you find yourself staring down a difficult road and facing running out of money, do not stick your head in the ground and pretend it is not happening. Engage your existing investors with the best set of facts you can assemble. Seek their input and counsel. They may have resources that they can deploy to help you, especially if you and your team have been making good progress and the problems are truly outside your control and do not appear to wipe out your opportunity. Even if the news is devastating, good communication with your investors will preserve your reputation as a high-integrity professional, which can be invaluable if you have to pivot or start again.

Unfortunately, sometimes, what we mean when the talk of the ecosystem is that a fundraising market is hard is that many startups will suffer devastatingly dilutive down rounds, asset fire sales, or will have to close their doors. Ultimately, a hard fundraising market is hard because many startups will fail to raise money when they need to and will not survive. No one wishes for such outcomes, which is precisely why you must be smart, disciplined, and proactive when the environment gets difficult to give yourself the best chance of building the momentum necessary to survive the storm and live to fight another day.