Source:
In this decidedly-less frothy environment, many founders are questioning how rocky their follow-on fundraising path will get in the months ahead — and adjusting expectations accordingly.
In our internal survey, we found that back on March 24, only 12% of the venture-backed founders we surveyed expected to raise less than previously planned in their next round. By April 9, that figure had doubled to 25%.
If you do decide to raise capital in this climate, remember the fundraising process will likely take much longer now. Plan for six months, not the shorter timeline that some startups have enjoyed in recent years. If you have an ability to raise at the same terms as your last round, consider that option (presuming that round was recent and you haven't dramatically outperformed). Raise on a SAFE at the last round price (as appropriate) and close the money quickly. Also, consider circling back to those who missed out. If there are VCs who wanted in on the last round but you couldn’t fit them in, reach out to them. You might also consider a top-off from a later-stage fund. While valuation is always important, comparable public valuations may be down by over 25% — so a flat round could be the new 25% up round.
These considerations aside, here’s the reality check Josh Kopelman is sharing with all of the founders he works with: “When you hear VCs saying that they’re still ‘open for business’ and writing checks, take it with a grain of salt. Pursue fundraising, but don't stake your business on a round coming together. In 2008, every VC on the planet said that. Yet if you look at the data, it tells a very different story. There was a greater than 50% drop off in overall venture funding from Q1 2008 to Q1 2009,” he says.
“In 2008, the average Series A company raised $4M on a $28.5M post. In 2009, it was considerably less with an average of $3.5M on a $14M post — half the valuation of the year before. And there were 30% fewer Series A rounds overall. So consider this backdrop as you talk to investors. On a daily basis, they aren’t just making a binary decision of whether or not to fund your company. There's a third decision which is, ‘Do I wait to decide?’ And I think that we should expect that a lot of investors are going to wait and see.”
In addition to funding sources drying up, the bar is also going up. “My experience is that during downturns, the yardstick changes. I explain it using a ‘Show me’ versus a ‘Trust me’ scale,” says Kopelman. “In boom times, it’s ‘Trust me.’ A founder says, ‘This is what I expect to do, and we're going to launch with bad unit economics, but in the future, it will get better,’ and investors will still cut a check — because they are willing to trust that the founder will be able to do that. During recessions, you're going to see far more investors sitting on the ‘Show me’ side. Founders will need to be able to say, ‘This is what I've done, here are my unit economics.’”
Many recession-era founders felt fundraising efforts were unlikely to succeed and thus not worth the time. Matt Sanchez (of SAY Media) had a strong point of view here: “Don't waste time trying to raise money in the face of an economic event. Urgency, time pressure and uncertainty are all working against you,” he says.
Ning and Mighty Networks founder Gina Bianchini agrees. “If you assumed you were going to raise in the next few months, you’re not**. You can’t grind it out and get there with 100 meetings. Right now, investors are a herd. They may take your meetings, but they’ll waste your time.** They’ll all chase the markets that are accelerating. Your existing investors might also move the goalposts on you. You might have been trying to go big on a billion-dollar business because that’s what they told you to do, but now they’ll say they want profit and cash flow. That’s why you have to make these decisions as a founder based on your own values and beliefs, which is scary. So many VCs are saying the best businesses are built in recessions. That’s true — but what they don’t tell you is that it never feels that way when you’re in it.”
Not all shared this view, though. “We got a round done two days after Lehman ‘sold’ for $200M,” says Seth Sternberg (of Honor and Meebo). “I was too naive to know that should have been impossible to get done. Crazy things can still happen if you just keep pushing and are willing to hear ‘no’ a lot.”
If you are able to get close to the finish line, do everything you can to get it done. “I had a signed term sheet right before Lehman fell,” says Alex Rampell (current GP at A16Z, previous CEO/co-founder of TrialPay). “I recall a heated negotiation with the partner post-term sheet, pre-close where he said ‘Why don't we see how much the Dow goes down tomorrow and discuss?’ I quickly shut up. Don't get cute on deals — just get them done.”
Oren Michels of Mashery offers a similar piece of counsel. “If you let your ego demand a high valuation when times are good, it will be very difficult for you to get funded when times are bad,” he says. “Having been through two of these downturns — I launched my first startup five days before 9/11 — I have seen high valuations kill a lot of companies. A CEO I know recently received a term sheet and (with the support of their existing investors) actually negotiated to have the pre-money valuation reduced by 20% from what the VC firm offered. That is healthy long-term thinking, and I really respect him for it.”