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Unless you’ve been living in a cave or on a mission to Mars, it’s kind of hard to miss how much the mood in money and tech circles has changed these past few months. The conversation has gone seemingly overnight from utter euphoria to panic and doom. It’s the same sentiment as back in March 2020 when the coronavirus took us all by surprise, investing froze and the stock markets around the world crashed.
Some say it feels even more like 2008 when we were on the verge of the Global Financial Crisis. Remember when trillions evaporated, enterprises collapsed and banks closed their doors (well, just one, but still)? Just like back then, the market is waiting for an impending slap in the face after letting a wild frat party mentality get out of hand.
The signs have been there all along — valuations went through the roof and relatively unproven companies pulled off eight-figure seed rounds. The market, however, is now sobering up and investors may be less generous to those companies when they come back for their Series A and B.
I’m not the one to tell you how to spend the money you already have. That’s up to you and your investors. But if you need a place to start, here are some tips for fundraising in these times of uncertainty.
Remember, the money is still there
Yes, the Federal Reserve has started increasing interest rates, but all the money floating around doesn’t just disappear overnight. Many venture capital funds are flush with cash, but now they are going to be more cautious about how they use it. Despite how all-powerful startup founders can think venture capitalists are, they still need to answer to their LPs.
I asked a founder of a leading Silicon Valley VC for his thoughts, and he confirmed my suspicions: “Entrepreneurs should remember good companies will always get funded. I anticipate there will be a flight to quality but that funding will continue at a slower pace likely with lower valuations.” He doesn’t think the current situation will result in a similar extreme freeze as in 2008.
The key question is: How can you position your company as a quality business that investors can easily justify?
Show your relevance
In the dying embers of the economy in the Global Financial Crisis, some of the giant companies of today emerged like a phoenix, such as Airbnb and Uber. Despite all the turmoil, they proved they could fundamentally reinvent entire markets, and this kind of innovation is irresistible to investors. The game is having an idea that’s just the right level of madness. As Gabriel Garcia Marquez wrote, “Crazy people are not crazy if one accepts their reasoning.”
Uber and Airbnb might have been strange concepts at the time. But the shared economy model was a hot trend and some venture capitalists were willing to take the risk, while some were not as we see in this timeless piece, and have probably kicked themselves multiple times for not reading the writing on the wall. For you, now, it’s all about listening to the headlines telling you where people’s pain and energy is going.
There are a few big trends that you can craft your story around, but the interest in both remote work and sustainability is hard to beat. You already know that in the post-Covid world, digital transformation has become THE vertical.
In the longer term, the amount of cash that will flow into slowing down climate change will be like nothing we’ve ever seen before. Even in recessions, there is guaranteed demand as governments and companies alike look to boost their green credentials. Remember, investors aren’t looking to double or triple their returns, they want to multiply them by 100. If you can prove you are where demand is guaranteed to grow anyway, you’ll have no problem raising money.
Display urgency, not desperation
Put yourself in an investor’s shoes — would you want to pump cash into a business that is barely surviving? Of course you wouldn’t. You’re in big trouble if you’re burning through your existing funding and are yet to prove product-market fit. The first step is slowing the bleed to buy yourself more time to get your strategy right. Investors can smell desperation in founders who approach them out of fear rather than opportunity.
There’s a delicate balance at play. You want to raise enough that you don’t need to raise again in six months’ time, but not so much to raise eyebrows. Investors have heard all the ridiculous stories of loss-making companies who buy all their employees Teslas.
The story you need to craft is still one of urgency. You want to demonstrate there’s so much demand out there for your product that their money will help you meet it, capture market share and grow. They must believe if they invest then you’re in a position to act quickly. The best way to prove this is to get your house in order so you’re telling them the truth.
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