Is it more difficult to raise early-stage venture capital today than it was a few years ago? That depends on who you ask, what stage your company is in, your narrative, your timing, and how you frame the conversation. Obviously, myriad factors go into fundraising, and there isn’t a one-size-fits-all approach.
Pitchbook predicts that venture investments into startups will declinedriven by a retreat in nontraditional capital that is now retreating from opportunistic venture strategies deployed over the past few years.” Essentially, more companies will be chasing less available capital in the coming year. That said, some VC funds still have dry powder to invest and good companies will still be able to secure capital.
Looking for guidance on how to successfully pitch investors? Four Pacific Northwest founders who recently raised money for their companies, or who are in the midst of doing so, shared their experiences, what the environment is like now, and valuable lessons and advice for those seeking capital in the near future. Our esteemed panel included:
- Mona Akmal, CEO and co-founder at Falkon AI, a go-to-market intelligence platform
- Pradnya Desh, founder and CEO of Advocat AI, an AI-driven platform for generating legal contracts
- Joseph Gradante, CEO of Allio Finance, a savings and investing app
- Brandon Schultz, CEO of Violet.io, a universal e-commerce API platform
Q: What’s your recent fundraising experience been like? Do you think it’s harder or easier to raise money than it has been in the last couple of years?
Pradnya Desh: It’s brutal out there right now. Even though funds have dry powder to deploy, they’re hesitating. Even regarding the speed at which meetings get scheduled—it used to be that you could get a meeting within a couple of days. Now, it takes two weeks. The whole process is slowed down.
Brandon Schulz: Series A is fundamentally different now. I think if you’re trying to raise a Series A right now, you’re going to probably have the most difficulty out of anyone, just given what the new requirements are. If anything, Violet was lucky to some degree around our timing. We raised a $10 million Series A 90 days after our seed round; we ended up raising $13 million last year. In most markets, that’s not going to happen.
Part of why that happened was, what was a prior seed investment became Series A investments. So all the late-stage Series A, Series B investors were trying to get in earlier, so you saw a lot of those hedge funds—Tiger Global and SoftBank, for instance—working their way in. All of those companies were suddenly putting billions of dollars that used to be deployed in Series C rounds and later and moving their way up, sometimes even into seed rounds. That pressure is what created some of the investment culture that emerged. As a result, all these early-stage firms were forced to increase valuations, capital investment, etc. That was good for a lot of us at that time.
That pressure has gone away. There are still a lot of great pre-seed and seed investors out there. They have capital to invest, but the overall valuations associated with that, and to some degree, the early revenue rigor, have changed.
The conversation I like to have with investors is around future valuations. If you’re talking with an investor, I think it’s a misnomer to say the market has fundamentally changed. If you’re raising a pre-seed round right now, that investor’s not expecting to get their money back for probably five years, if not 10 years. We don’t know what the market’s going to look like five or 10 years from now. Similarly, five years ago, people that were raising money had no idea that there’d be a downturn like there is today. The right pre-seed investors and seed investors understand that. They’re looking for the right companies and they will make the investments. Outside of that, I’d say fundraising is more difficult and it’s definitely getting tighter.
Mona Akmal: When we started raising in May of 2022, right about when the meltdown was at its peak, many of founder friends said to me, “You’re going to have to talk to a hundred investors to get one term sheet.” We spoke with six investors and closed a round.
How has the fundraising environment changed—compared to what? If you compare it with what was happening in 2020, which I think of as a pure scam, just fraud, I don’t consider that fundraising. If you compare the current fundraising market with 2016, for instance, it’s back to normal—unit economics matter. If you’re a Series A company, you have to have revenue. You can’t be pre-revenue unless you are in a very specific specialized space like cybersecurity or fast databases, for example.
In our experience, if you are business focused on building something durable that has sound unit economics, you’re not going to have a problem raising money, especially if you’re operating in a large market. But gone are the days of showing up in a room and charming everyone, and talking about how the [total addressable market] TAM is infinite and appealing to people’s greed, and getting a $100 million dollar valuation for $0 in revenue.
Joseph Gradante: Things have slowed down, particularly on the VC side. But as Mona just said, compared to what? Things are more back in balance now with where they were in 2015 and 2016. Particularly in FinTech, valuations have been insane and lofty. They were too big to begin with. I think it’s good that there’s been a healthy correction in the market.
Many opportunities exist in venture debt and family offices. They’re sitting on a lot of dry powder, but it takes longer to move the needle. Sometimes it’s harder to get meetings. You have to be resourceful.
Outside of that, I think great investors still recognize great companies. The macro climate has obviously changed, but there’s a lot of factors—artificially low interest rates for too long and the uncertainty. But there’s always uncertainty. You don’t know what the future holds. Good companies are going to be good companies, and business cycles tend to follow a certain pattern. I have no doubt that it will follow the same pattern this time. And in two years, things will be back to the way they were in 2019/2020 because that’s just the way things go.
Q: What are some of the most important lessons you’ve learned while fundraising?
Joseph: You have to be patient. Things do not move quickly; the due diligence process is long. You’ve got to be extroverted—you’ve got to get over the fear factor and just put yourself out there.
Pradnya: Run an organized fundraising process. In the heat of the moment, it’s hard to do that, especially looking down the barrel of runway. From the beginning, it’s really important to get it right with your target list and warm intro to everybody on the list. Have a very organized and accurate data room that’s ready whenever somebody needs it. And be quick in your follow-ups.
Brandon: My first lesson is don’t raise capital if you can avoid it. It’s painful, it’s terrible. I only say that because I’ve gone through the process. I’m thankful that we have. But I also say that because the way the market is structured, people are often going after specific outcomes and milestones, and sometimes you can lose sight of the things you actually need to accomplish from a business perspective. We definitely fell victim to that. It’s one thing I wish I had handled differently in the past.
Second, raising capital is not about raising capital. In my opinion, it’s all about belief. Raising capital is the outcome of a set of beliefs that someone else happens to share with you. Specific investors have their own thesis on what they’re doing. Especially if you’re doing something interesting and new, it’s not always going to fit into those boxes.
Mona: So many learnings. Tactical ones: Do your research on your investors. And then focus on the investor group that you really should be talking to. If you can, eliminate a bunch of investors. Just like you have an ICP—an ideal customer profile—for your customers, you should have an ideal customer profile for your investors as well. It starts with the firm. and then it should go down to the actual partner you want to talk to.
Second, never share your pitch deck, especially in the early stages. Pre-seed, seed, Series A is still 50%- 80% about the storytelling of the founding team. You cannot capture yourself in a deck. I’ve never shared a deck and I never will, because you’re selling yourself, and your vision. Less is more. Slide decks, data rooms, everything is a crafted story. The more information you share, the more surface area of attack you are opening yourself up to. So share as little as possible.
Every investor will have concerns about why they should not invest in your company. A concern is just like an objection in a sales process. It doesn’t mean it’s toast; it means you have to be able to handle the objection effectively. Founders tend to go overboard when an investor throws out an objection or a concern. They go off into a long-winded explanation, which doesn’t inspire confidence. Give the shortest, most precise answers to handle or reframe the objection.
Last trick: Sometimes the objection doesn’t need to be handled. You need to say, “That’s actually the wrong way to look at the problem. Let me give you a better way to think about it.” You want to play on the offense, you never want to be on the defense.
I’ll add one more: Even when you’re fundraising, you’re never fundraising. All our conversations were, “Hey, we’re not actively looking to raise money, we’ve got money in the bank. We’re just exploring what a company like us would need to have in terms of our core metrics and our story.” I practiced my pitches with partners at great firms without fundraising. It just so happened that one of them wanted to put their money behind us. This practice creates a perception that you are not selling your company, [investors] are buying the right to participate in your amazing company and journey.
Q: Are there any other words of wisdom or advice you’d like to share?
Brandon: I have two main rules of thumb relative to raising capital. First, I want to make sure that in my space and regarding my product, I will always be better and smarter than the investor I’m talking to. That is important because when I walk into those conversations, there’s a strange power dynamic. Someone else on the other side of a Zoom call is the one with all of the power and all of the capital, but they aren’t the ones in the trenches every day trying to solve the problem, let alone with years of experience. Although I had the proximity, which is the actual currency, I wasn’t translating that into a level of rigor and clarity that would give me that position of power about how to deploy capital. That was a miss for me.
When I advise others, I say, “If the investor knows more about your space and/or your product and competitors, you’re not going to be able to raise capital from that investor.” I have that as a standard for myself as well.
The second one, especially in the early stages, is leverage great advisors. They are worth their weight in gold. Hold yourself to a high standard on who you select. Once you have those trusted advisors, listen to what they say, and then go build a great product and team. If you do those things, everything else will fall into place. The advisors will get the access you need, they’ll help you with raising capital, they’ll force you into a level of rigor with your own business and hitting metrics and requirements ahead of time. I always recommend that.
Joseph: I think picking the right board member, or that first board you set up is absolutely crucial. You have to have trust there. You want somebody who’s strategic and can help you in what you’re trying to achieve. And know your competition.
Mona: Think of fundraising and investors just like a sales process or a game. You have to be able to look at the players in the game, understand the rules and their motivations, and emotionally distance yourself from the game that you’re playing. It’s like playing chess. You have to be able to look at the chess board and figure out what your next best play is.
I would also say focusing on your mental and physical health during the fundraising process is critical. So if you’re not seeing a therapist, get one because you’re going to need it. If you’re not working out, get a fitness coach and put in at least 120 minutes of hard workouts every week. You need the cortisol to release from your system. Otherwise, you’re not mentally fit to play this high-stress chess game that is fundraising. Peak performance in the mind and the body will result in a good fundraising process.
Pradnya: If you’re fundraising now, conserve cash. And hang in there. This environment that we’re in is not going to last forever. We’re reading that maybe by summer or fall 2023, we’ll be out of it. So make sure that you are set up to be fine until then.
For additional insights on early-stage fundraising from our panel of CEOs, check out our podcast, The C-Suite Chronicles on Apple Podcasts and Spotify. You can also watch the video recording on the WTIA YouTube channel.
The post Venture Trends: Can Startups Still Secure Early-Stage Funding Despite Recession, Economic Uncertainty, and Dwindling Dry Powder? appeared first on WTIA.
