All You Want for Christmas is Funds?🎄

What are you thinking about this Christmas Holiday season?

Hi there 👋

I hope you had a Merry Christmas and that the new year brings you and your startup awesome things.

Before I share the next five questions, investors ask in the next few weeks, as promised.

(if you didn’t see the last post on 10 Questions Investors Ask, check HERE)

I wanted to discuss the fundraising climate more generally and share my thoughts. Over the holidays, you’ll have seen the slow down even more.

But there’s a bigger issue at play here.

You know the drill. You’ve heard the story. It is no longer a founder’s market. It is now an investors market.

What does that mean?

• The valuation in the public markets has lost a lot of value. For context, Facebook for example was around $300 per share in Dec 2021, to about $119 in Dec 2022.

• The private market mirrors the public's, forcing investors to think of valuation more realistically.

• Startups in the private market are now generally overvalued.

• Also, macro-economic conditions make VC as an asset class not as desirable as it used to be

• In this environment, VC fund portfolio companies might find it challenging to raise higher rounds (or if at all); investors are shifting focus from new investments to existing companies.

• Funds know this is becoming an investors market and are incentivised for this to happen, and are likely to slow down deploying and wait for the market to crash to get more value for money.

Investment in new companies is slowing down, and it's worse for emerging markets where some international VCs “visited.” Since things are tough now, you will likely see a lot of capital flight.

Most investors are leaning towards a holding pattern and this affects later stage (Series A+) much more, but it is reasonable to expect that it will soon begin to affect the early stage (pre-seed, seed)

If you get a variation of this email as a message;

“We’re taking a more considered approach in how we think about our investments given the current climate. Although we are taking this view, we are always open to speaking with founders”

What it means: We are not investing right now but we still want to see deals.

Be careful about this dynamic, right now your greatest asset is “time”.

Be very careful how you spend it and don’t let anyone waste it.

As you consider fundraising in this climate, here are five tips to consider:

1. Hyper Focus on Monetisation from Customers:

   Here’s a funding source that does not dilute your ownership and can help you be in a stronger position to raise if you haven’t. Revenue from your customers, and now is the time to ensure you’re monetizing quickly and consistently. If you were going to delay this, you might want to reconsider.

2. Start with Angels:

   As you gain some decent traction on monetization, angels are a better bet for making quick and high-conviction investments. Although it might be small, angels are likely more conservative in this climate, but these funders don’t have the bureaucracy of VC funds and, if bought in, can make decisions super quickly, and with them, you can make iterative progress.

3. Be Careful Of Dilution:

   In this clime, valuations will be low, and you’re likely to be diluted even more. Be careful with this; aim for a maximum 20% dilution per round, reducing with each consequent funding round.

4. Don’t Ignore Growth: Mainstream advice is to stay “default alive”, which is true. A dead startup can’t grow. However, don’t be deceived; if you want to raise VC funding, they will want to see signs of rapid growth (whatever that means in this context). As you stay lean, figure out innovative and cost-effective ways to show strong customer demand for your product.

5. Focus, Focus, Focus: I reckon this goes without saying, but now’s not the time to have multiple strategies at once. Now is the time to demonstrate laser focus, efficiency, and slow monthly burn, a.k.a. The amount your startup needs to run each month.

6. Maintain VC Relationships:

   If VCs aren’t actively deploying, now is the time to keep these relationships warm. Be inquisitive, as opposed to a direct pitch; ask them what they are looking for during conversations and keep them passively updated with your progress (if it’s good)

Finally, if we are keeping it super real, this is as good a time as any to ask yourself:

“What will you do if you don’t get VC funding?”

Innovation happens amid chaos, and this might be an opportunity for you to test how resilient your startup is and to prove if it has what it takes to survive in an environment without VC funding. One could argue that the best businesses will pass this test.

This may be a time to ask yourself some difficult questions and make even more difficult decisions.

Founders, you're the story's heroes, and i'm rooting for you.

Till next time, or next year?

Maria