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Before 2021, the market was a veritable unicorn farm. It averaged 150 births per year with startups reaching unicorn status in record timeframes. Last year saw venture capital (VC) funding reach $620 billion, more than double the year before. But this fertile ground is growing barren as challenging and largely unexpected headwinds — a prolonged pandemic, war in Europe and sky-high inflation – hinder the growth of businesses across all market caps and industries.
Ongoing supply chain disruption and Russia‘s invasion of Ukraine are two main drivers of record-high inflation. The Federal Reserve has responded by ordering the largest interest hike in more than two decades with plans for further escalation. Federal monetary policy might serve as a further deterrent for investors watching overvalued startups endure layoffs, hiring freezes and high-profile falls from grace.
This onerous investing climate has been particularly strenuous for startups pursuing fresh capital. Last year, startups were adorned with lofty valuations. But the pandemic’s continued impact and the outbreak of war in Ukraine have compounded to reverse this trend. Knowing how to navigate the capital markets under these circumstances can make or break the success of a fundraising round.
How to overcome difficult macroeconomic factors and successfully raise capital
Fundraising in the current environment can be daunting. Investors contributed $144 billion to startups globally in the first quarter of 2022. That was a 19 percent decline from the previous quarter, marking the largest percentage decline since the third quarter of 2012. Q1 2022 also saw the number of deals completed drop to 8,835, falling five percent from the fourth quarter of 2021. Investors back startups because of their potential. In today’s market, they’re more inclined to invest money in a sure thing. The current climate makes it difficult for entrepreneurs — especially those whose startups are pre-revenue — to raise funding. Difficult, but not impossible.
Some startups have proactively lowered their valuation, but you may not have to resort to this. Approach fundraising with the knowledge that today’s investors are looking for practicality more than potential. The goal is no longer unbridled growth, but sustainable growth. In March 2022, my company announced that we’d raised $22.2 million in funding. Below are some key tips we found helped in our efforts:
1. Identify market need
In the past, investors might have been more receptive to injecting capital into a startup that anticipates a future need. But as investors become more selective, they’re prioritizing startups that address current issues. From citing statistics to including personal anecdotes, founders should make a case for market need by including relevant total addressable market (TAM) stats in their pitch decks. This is part of the motivation investors need to commit to a startup — and make it clear why your business can help fix a widespread problem that needs to be solved. In addition to the market opportunity, founders and CEOs need to also rely on previous successes to demonstrate credibility, especially in the SaaS market.
2. Use supporting data
For early-stage companies looking to secure funds, focus on data points that illustrate a clear market trend to validate the demand for your product or service. Clear data regarding the size and preferences of your total addressable market will help inform transparent conversations with potential investors and show the potential for sustainable growth. Drawing on past successes can help tell your larger story and showcase a track record of success (more on that below).
3. Quantify past successes
In the absence of hard numbers on your current endeavor, metrics from past accomplishments can help founders paint a picture of future success. Founders with a track record of startup success are well-positioned. They can convince investors that they are a credible force in the startup space, capable of effective money management as we endure lean times.
4. Outline your next steps
Just as politicians outline their first order of business upon taking office on the campaign trail, startup founders can build investor confidence with a solid, well-articulated agenda. Nail down an airtight plan for value creation. Commit to lean operations. Be prepared to tell investors exactly how you’d spend their money over the next few months.
5. Be nimble and maintain your options
Before closing on our March 2022 funding package, we pursued several investment discussions, some of which did not pan out. In the end, we put together a financing package comprising three distinct elements (equity, convertible debt and standby facility). These appealed to different investors while meeting our needs for cash and liquidity. Casting a wide net worked for us and it can work for you as well. Make sure to take advantage of networking opportunities, such as engaging with online communities and attending in-person or virtual networking events. You never know who has the capital or connections to help get your dream off the ground. Or, help keep the lights on while you’re closing and cultivating new business.
Moving against the grain
We can’t control macroeconomic hurdles to fundraising like ongoing supply chain disruption, war, inflation and rising interest rates. Founders can, however, control how they position their company to investors. They can even use these circumstances to their advantage depending on the product or service they offer.
If you’re trying to raise funds in the current economic and geopolitical climate, now is the time to expand your network, identify market need, solidify your growth plan, gather evidence of past successes and effectively communicate your intentions to investors.
While it may seem unattainable, fundraising amidst a taxing macroeconomic environment can be achieved if you understand how to navigate headwinds out of your control.