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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 times. Last year venture capital (VC) funding reached $620 billion, more than double the previous year. But that fertile ground is turning barren as challenging and largely unexpected headwinds—a protracted pandemic, war in Europe, and skyrocketing inflation—hinder business growth across industries and market boundaries.
Continued supply chain disruption and Russia’s invasion of Ukraine are two major factors behind record inflation. The Federal Reserve has responded by ordering the biggest interest rate hike in more than two decades with plans for further escalation. Federal monetary policy could serve as a further deterrent to investors who see overvalued startups suffer layoffs, hiring freezes and high-profile falls from grace.
This onerous investment climate has been particularly grueling for startups looking for fresh capital. Last year, startups were graced with high valuations. But the continued impact of the pandemic 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 today’s environment can be daunting. Investors poured $144 billion into startups globally in the first quarter of 2022. This was a 19 percent decline from the previous quarter, marking the largest percentage drop since the third quarter of 2012 .The first quarter of 2022 also saw the number of completed deals drop to 8,835. a five percent drop from the fourth quarter of 2021. Investors back startups for their potential. In today’s market, they are more inclined to invest money in something safe. The current climate makes it difficult for entrepreneurs, especially those whose startups have prior revenue, to raise funds. Difficult, but not impossible.
Some startups have proactively lowered their valuation, but you may not have to resort to that. Approach fundraising knowing that today’s investors are looking for practicalities rather than prospects. The goal is no longer rampant growth, but sustainable growth. In March 2022, my company announced that we had raised $22.2 million in funding. Here are some key tips we’ve found helpful in our efforts:
1. Identify the needs of the market
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 prioritize startups that address current problems. From citing statistics to including personal anecdotes, founders should justify the market need by including relevant total addressable market (TAM) statistics in their pitches. This is part of the motivation investors need to commit to a startup and make it clear why your company can help solve a widespread problem that needs to be solved. In addition to the market opportunity, founders and CEOs also need to rely on past successes to demonstrate credibility, especially in the SaaS market.
Related: What entrepreneurs need to know about early stage funding
2. Use supporting data
For early-stage companies seeking funding, focus on data points that illustrate a clear market trend to validate demand for your product or service. Clear data about the size and preferences of your total addressable market will help you have transparent conversations with potential investors and show the potential for sustainable growth. Drawing on past successes can help tell your larger story and show a track record of success (more on that below).
3. Quantify past successes
In the absence of hard numbers about your current effort, metrics from past successes 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, able to manage money effectively while weathering lean times.
4. Describe your next steps
Just as politicians outline their first order of business after taking office on the campaign trail, startup founders can build investor confidence with a solid, well-articulated agenda. Define an airtight plan for value creation. Commitment to Lean operations. Be prepared to tell investors exactly how you will spend their money in the coming months.
5. Be nimble and stick to your options
Prior to closing our March 2022 funding package, we held several investment discussions, some of which did not go well. In the end, we have drawn up a financing package consisting of three distinct elements (own funds, convertible debt and standby facility). These attracted different investors while meeting our cash and liquidity needs. Casting a wide net worked for us and it can work for you too. Be sure to take advantage of networking opportunities, such as engaging with online communities and attending virtual or in-person networking events. You never know who has the capital or the connections to help you get your dream off the ground. Or, help keep the lights on while you close and grow new business.
Related: Why founders should embrace debt along with equity
We cannot control macroeconomic obstacles to fundraising, such as supply chain disruption, war, inflation, and rising interest rates. However, founders can 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 cast your net, identify market needs, solidify your growth plan, gather evidence of past success, and effectively communicate your intentions to investors
While it may seem unattainable, fundraising in the midst of a challenging macroeconomic environment is achievable if you understand how to navigate the headwinds outside of your control.
Related: Want to get a VC’s attention? Make sure you do these 6 things.