Tips on How to Approach Funding in the Current Market

FastCompany | Leslie Feinzaig | Feb 6, 2023

Image: Freepik/yanalya

There was a moment last spring when startup founders across the globe experienced a sudden collective whiplash. It was the Great Venture Capital Reset of 2022, when fundraising activity screeched to a halt after running fast and hot for the longest bull market in VC history.

• Data from last quarter also confirms that rounds are taking much longer to come together.
  • “The average time between a seed round and a Series A stood on average at 621 as recently as Q1 2021”.  In Q4 of 2022 it was 798 days. That’s the highest we’ve tracked in more than five years.”
  • Valuation caps were also lower: Median seed round pre-money valuation dropped to $14M in Q4 compared to $15M in Q1 2022, and median Series A was $39M in Q4 versus $50M in Q1. In other words, rounds are happening, but they are low and slow.
  • VCs spending more time and dollars on existing portfolio firms: A recent report published by DocSend suggests that founders are sending out 30% more pitch decks since the start of 2022. Unfortunately, VCs are engaging with them 23% less often.

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• New norm for now: Advice for founders who are considering raising an early round of venture capital this season.  When it comes to valuation caps, the new normal necessitates that founders be realistic, forward looking, and even pragmatic. “Instead of thinking, ‘How much do I believe I’m worth?’ shift to “What valuation can I grow into comfortably in a short period of time?” says Hernandez Middleton.
• I encourage founders to create a financial model that connects expenditures to business outcomes and use it to determine how much money you really need to get to the next stage.  Investors are paying very close attention to these numbers, and the reasoning behind the numbers.
• Metrics:  traction was a key factor for successful fundraising in the latter half of 2022.  VCs spent 41% more time looking at traction in decks. It was the “most-scrutinized section among companies that didn’t receive funding.” In other words, traction alone won’t get you a round, but a lack of traction will thwart you.
• Be current:  encourages founders to revisit their customers’ needs and the problem they are solving. “We’ve been recommending founders go deep with customers to refresh any early discovery work—does your initial value proposition still solve an urgent problem?” she asks. “Make sure you understand how their world has changed in this market.

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• Investor-founder fit:  One thing that makes fundraising much easier is to have strong investors acting as your advocates.  “Finding investor-founder fit is more important than ever. As funds continue to grow, specific partners focus on specific theses. And as VC firms proliferate, each fund has a very specific mandate. My advice to founders is to focus on finding your believers, and ignore the noise of the crowd.”

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