Raising Startup Funding Used to Be Easy—Not Anymore

In 2021, when Roshan Patel was raising the first round of funding for his startup Walnut, his email inbox overflowing with interest from investors. Venture capitalists loved his idea of ​​applying the buy-now-pay-later concept, a $100 billion industry, to health care bills. Patel secured $3.6 million that spring and stayed in touch with some investors who could bring in more as the company grew.

But when Patel sought a second round of funding in February, after the public markets plummeted, investors were less warm. The VCs now asked him questions about unit economics, sales efficiency and the path to profitability. “These are questions I was hoping would come later,” says Patel, when the company was more mature. When he explained the startup’s mission and goals to investors, “it was like, ‘Okay, but what about the financial stuff?'” Patel stopped short of pitching Walnut as “Affirm for Healthcare “, as Affirma’s stock had already fallen 90 percent. In May, it closed a $10 million round, with another $100 million in debt financing.

As of now, the public and cryptocurrency markets are decidedly bearish, and the 2021 VC funding fest is over. Meanwhile, startup founders are hungover. Global venture funding plunged 26 percent in the second quarter of 2022, according to a Crunchbase report. Early-stage funding fell 18 percent, suggesting that trouble in the public markets has now narrowed to smaller startups, which tend to be more protected from economic calamities. The sudden change has thrown some founders into a tailspin and left others regretting not raising money sooner.

“Timing is everything,” says Emily Smith, the founder of ed-tech startup TeleTeachers, which began raising its Series A in April. “If I had decided to raise funds a few months earlier, I think I could have closed it and moved on. But it’s not fall 2021 anymore.” Smith is still meeting with investors.

Smith says his startup has enough money in the bank to survive a funding downturn, but worries about the company’s valuation. Initial round valuations fell 16 percent in the second quarter of 2022, according to a Pitchbook report, the first decline since the start of the pandemic. If a startup is valued too low, founders may be tempted to give up too much capital to increase their total funding and face fundraising problems in the future.

At the same time, inflated valuations can also create problems. Last year, 340 companies achieved unicorn status, with valuations in excess of $1 billion. Some have been caught off guard by the changing market, and many are scrambling to cut spending or lay off employees. Some have had to settle for “down rounds”, accepting new investments at a lower valuation than before. Klarna, the shop-now-pay-later pioneer, raised $800 million from investors in June, but had to cut its valuation from $46 billion to $6.7 billion, reducing its value by 85 percent.

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