Webinar | Fundraising in a downturn

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Raising a round can be daunting, especially in an uncertain market. In the second part of our fundraising webinar series, we go in-depth on what you need to do to meet new investor expectations.

  • Raising in a downturn: Get (and hold) investors’ attention during an uncertain time.
  • Perfecting your story: Think through your narrative and craft the most effective pitch deck.
  • Following up: Build rapport and maintain relationships with investors post-meeting.

Want to read more? Access the webinar slide deck here.

If you missed the first webinar in the series on preparing to raise your round, watch it here.

Will investing accelerators (YC, Acceleprise, Alchemist) pull back as well?

The accelerator market had only just gotten started in 2008, so there isn’t a precedent. It’s likely that many accelerators will contract, since many of them had weak metrics around VC funding of their cohorts, even during the bull market. YC will keep investing since they have so much capital, but the metrics of their cohorts that raise money after the program will go down since there will be fewer investors investing in them. However, it’s likely that going to a top accelerator like YC will still be the best way to get on the radar of investors and raise. 

What compounding moat do VCs use to find you?

Their personal networks. The more people they work with, the more companies that they invest in, the more people that recommend them to others in the future. Most of the top successful VCs source almost all of their deals from their personal networks because they are so large, while VCs new to the business have to do more legwork to find investments. 

Outside of press coverage and customers singing your praise, what are the best examples of “brand marketing” to investors?

Content marketing, where you publish blog posts, videos, etc. that are widely read and distributed. They can be about your product, your business, your customers or even just your market. This approach usually works best when you have some data no one else has, such as market insights. Buffer did a great job of this just by being completely transparent about the state of their business. 

Should we try to extend our seed round and add more to that instead of raising another round?

If you need more capital then that is a great idea. 

We are an EdTech startup that just finished raising funds we needed to get through the next 12 – 18 months. Because of the current environment we now have investors coming to us. We are concerned that fundraising could be hard in 12 – 18 months for our next round if needed. What questions should we ask ourselves now to determine if we should take the money now or wait?

If investors are coming to you, always take advantage of it and take the capital if it’s on good terms. There is no guarantee they will even take a meeting with you in 12 months when you want to raise, so do it now! When you hit gold you don’t ask if the mine is in the right place, you just start mining. 

Does having a higher valuation really give you less flexibility? If you had a super-high valuation, couldn’t you always just take on the same amount of venture funding as you would have with a smaller valuation (but while keeping more ownership), and then if you need more money later, raise some sort of bridge round?

No, because future investors will see you as too expensive. If an investor invests $10M into a company with a $100M valuation they buy 10% of the company, but that same $10M only buys 1% of a $1B company. It’s also unclear how much larger a $1B valuation might grow in the future, whereas a $100M company can credibly get a 10x return by growing to $1B. Those examples use very large numbers but the same is true at the smaller scales as well. 

Additionally, if an investor thinks your current valuation is too high you might have to raise at a lower valuation. Raising a round at a lower valuation than your previous round (down round) triggers the anti-dilution terms of the previous investments and means the previous investors get more ownership without investing any more money. This is typically how founders and employees get wiped out, since the anti-dilution terms coupled with the new investment squeeze out everyone else. 

Finally, a high valuation makes it more expensive for an acquirer to buy you and less likely that they will. There are plenty of buyers for a $100M company but very few for $1B. Investors have that in mind when deciding to invest in you.

Would like to know your opinions on getting ‘warm intros’ to VC right now and/or reaching out cold vs. waiting a few weeks given the state of the country and recent shift in the market.

If you can wait I would wait, since no one knows what will happen and as a result many are waiting to see. How long to wait is a great question, probably at least a few months.

If we need to go out to fundraise now, would you wait a few weeks to let things settle (6 weeks or so)? We have received advice to wait a few weeks to go out to raise.

I would wait a few months, not weeks. Until there is more stability it’s impossible to know if you will be wasting your time since it’s not possible to know who is investing and in what. Times of uncertainty give rise to great companies, but if the future is impossible to predict investors pull back and wait, because they can. They would rather wait and pay a higher price to invest in you when the market settles than get a cheaper deal with uncertainty now. 

What are the logistics of actually getting the meetings in this climate? Now that all of the networking events are canceled, is it more about online connection and meetings? What do we focus on to have productive virtual meetings?

That depends on the firm and investor you are speaking with, there are no clear rules right now. Virtual meetings are, in some ways, better than in person since it’s easy for you to show your product demo, deck, etc. without AV problems. So, if an investor takes the meeting I would approach it like you would an in person meeting, but press the investor for details on their investment process. If they don’t have details on how their process works remotely then they probably haven’t figured it out and likely aren’t investing at all. 

What are the expectations of investors in terms of return in the value of their investment in seed rounds? I hear 10x or more on a $3-5mm investment netting 10-30% of a company at time of investment.

You should ask the investors when you first meet them since the portfolio strategy varies by firm. All firms will happily tell you about their typical check size, return targets and ownership targets (if they have them). It’s likely best to assume all investors, in all rounds, expect a 10x return, since it puts you in the right frame of mind for pitching them and building a relationship. 

How are pre-seed companies valued?

All venture companies are valued based on how much money you are raising and how much ownership the investor wants. So if you are raising $1M and the investor wants to own 20% then you are valued at $5M.

Do you think this “vision” selling is a general rule working worldwide, or just US? Could it be that in different geographies VCs/investors may have different criteria of evaluation?

It’s true of any venture investor, due to the economics of venture funds. The vision is what convinces the investor that a 10x (or higher) return is possible, and venture portfolios rely on 10x returns to produce fund returns. What an investor considers a credible or good vision does vary by investor, and geography is part of that, but the importance of it doesn’t change. 

Based on the conversations I have with pre-seed/seed investors, all of them are looking for product/market fit with some revenue. Do you believe this downturn will move these investors back to founder/team vision vs. revenue?

No, I think it’ll make them look for even stronger product/market fit and more revenue. Venture investors, like most investors, get more conservative in down markets so their expectations increase. A company that might have been able to raise a few months ago might need 50% more revenue to get the same deal done, with a lower valuation, next month. The best way to protect yourself from this is to be as capital efficient as possible so you need less capital. 

How important is discussing selling vision vs. product?

The vision is all that matters. You can raise funding with only a vision, but even the best product can’t help you raise if it isn’t coupled with a vision. Luckily, it’s often the case that the vision is apparent from using the product so they are coupled together tightly. If that is not the case for you, you’ll need to ensure you use your pitch to clearly connect your vision to your product. 

How do I create an effective slide in my pitch deck showcasing where I see my company/product in 10 years?

To be clear, most of your deck should be about your company in 5-10 years. Having a single slide on that is not enough, since the investor is buying into what your company can become. So, the problem you frame, the solution, etc. needs to focus on where you are going and not where you are right now. If you have a deck with a single slide about the future and 9 slides about where you are right now you won’t raise funding. 

Do titles matter while fundraising? Can we bring a VP Growth to investor meetings now that we need all hands on deck, or should we strategically update his title?

In general titles don’t matter at all. The CEO is the one that needs to do all of your fundraising, so as long as there is someone with the title of CEO who does the fundraising then you should be fine. The later stage your company the more investors will look for a complete executive leadership team, but even if you have holes they will consider it since they can often help you hire for the roles you are missing. 

Investors are saying they would invest, but they need to save their cash during this difficult time for their existing investments. How should you approach this objection?

They are probably telling you the truth, most venture funds are scrambling to save their existing investments right now. I would give them a few months and reconnect.

I’m pitching an A round, and an investor says “we are going to be in a holding pattern but are interested”, how does it look to say “during this crisis, we are thinking of opening a quick note round as well if interested” – does that look desperate? Is it better to just not say anything about a note round and leave it be?

If they were going to invest they would pursue conversations with you anyway. Early investors don’t really care whether your round is equity or a note, if they decide to invest they will. It sounds like an investor using the current environment to pass on companies, or at least wait to see you show more progress before engaging. 

Should you state what “Round Stage” you’re at when reaching out to investors? E.G. Series A, Seed, Pre-A, etc. When investors frequently reply we only invest x stage, y stage, z stage often without context and seems to be just a blanket excuse. In other words how do you establish what stage you’re at without investor engagement?

Most investors focus on a specific stage so by reaching out to them you are indicating you are at that stage. It is possible you will reach out to investors that don’t invest at your stage, but that’s fine and a normal part of the process. Just use that to calibrate what the right stage is for you, and who you should target.

It’s possible it’s a blanket excuse, but it’s also likely the truth. 

How would you handle an investor who committed to an investment and signed agreements but in installment payments and now refuses to fulfill his investment?

Assuming they signed legal documents committing to the investment, they are in breach if they fail to adhere to the terms of the agreement. Unfortunately your own recourse is to sue them which is expensive. If you speak to them and they have no intention of paying I would talk to your lawyer about your options. 

Our investors are going back on their commitments, and now we’re scrambling to fundraise to survive the downturn. Do you have any advice or suggestions to get through this? 

That is happening all over right now. The best thing you can do is an enormous amount of reference checking on any investor you spend time with. Talk to their other portfolio companies, other investors they work with and any founders they invested in whose companies failed. Founders typically do very little reference checking on investors, but you should do as much (if not more) diligence on them as they do on you. Most everything you need to know about whether you can trust them will come out of that research.

Can the LP take money out of a fund, particularly in this environment?

Typically only if the LP goes bankrupt, but funds do sometimes let LPs scale back their capital commitments if they want to retain the LP long term. LPs usually invest across many venture funds so the long term relationship is what’s important.

There are extreme cases of VC fraud where LPs can get out, but that is very rare (thankfully).

How do you think about capital intensive startups? What success stories do you know? How does your advice for fundraising, change, if at all?

Capital intensive companies struggle to raise in a down market, since the investors’ dollar doesn’t go as far. An investor would prefer to distribute risk by investing in a bundle of low-capital companies instead of one high-capital company. This is why hardware companies, etc., typically don’t get funded in a down market. 

The success stories I’ve seen are when these companies pursue strategic investment and not venture investment. Strategic companies have different economic return models and might be willing to invest more in something with more risk if it can produce meaningful results for their business. I would focus on finding those partners. 

If I’m in a field that is more recession resistant (tele-medicine), should I put that in my deck? Or, should I think the investor is smart enough to know that the product the company has is ideal for the current environment?

If an investor doesn’t realize that you are counter-cyclical then they aren’t a good investor. It should be clear based on your early traction that you are growing, I don’t think you need to call it out specifically. However, it can’t hurt to mention that the business is growing strongly early and often. 

My company just fundraised — how do you suggest adjusting our budget and plan for the future based on a new market environment?

Don’t raise your burn rate until the market stabilizes and you can reliably project the future. Having just fundraised you are in the enviable position about being able to extend your runway by avoiding new spending instead of cutting, so do that. You can increase your spending later when you have a better sense of what will pay off. 

What is the best approach with employees towards cost cutting since I have to sustain the slump until the next round of funding?

Communicate clearly and make any cuts all at once. You’d rather lay off everyone at once than a few people at a time since the latter will destroy the confidence of the remaining employees and crater your morale. If you think you will need to cut, I would do it immediately – tomorrow if possible.

Then make sure all the employees know why you are cutting, how much runway you have and what that means. Trusting them will pay off long term. 

Did you quantify/assess capital efficiency? If so, what was the basic method when you’ve done it for past companies?

The lower your burn rate the more capital efficient you are, assuming your business metrics still grow. That last part is critical, you don’t want to save money at the expense of growing the business (even if it’s slow growth) since you’ll just die a slower death. 

Efficiency is different for every type of business so it’s hard to quantify. There are metrics like Sales Efficiency you can use, but they are typically trailing indicators so by the time they tell you your efficiency is too low it might be too late to fix. 

For pre-seed raises, is it acceptable to be an LLC with shares only stated for founder, or should other key C-Suite contractors be given ownership up front?

Investors will typically not invest into an LLC, since you’ll have to change to a C-corporation later anyway. The earlier you switch to a C corp the easier things will be later, so do that now. Investors might not care if anyone has ownership in your company, but you should. Anyone working on it deserves to own part of the company, doing otherwise is unfair.

Webinar | Fundraising in a downturn 2

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