How to successfully raise capital in a downturn

It’s safe to say that most entrepreneurs stepping into a VC room are already aware of the new reality that has set in, VCs are slower to write checks, more judicious about their investment process, and generally offering lower valuations than the past two years.

Some VCs are even announcing the new norm before the meeting starts. A friend who is currently raising a round shared with me that he entered a meeting with a prominent VC in Israel and was surprised when she initiated the conversation, saying “Listen, times have changed. I wanted to let you know that we now look for better deals and are offering more aggressive terms than in the past…”

And yet, you could make an argument that a downturn is perhaps the best time to start a company. Why? In boom times, the pressure is on growing fast and burning cash in the process. In this climate, VCs are patient, stressing a diligent product/market fit process, building out real revenue streams, and allowing the company to scale at a sustainable pace.

Here are a few things founders can do to improve their odds for successfully fundraising in this climate:

1. FOMO (fear of missing out), yes your metrics matter, and the team matters too. But perhaps more than anything investors are driven by FOMO. You may not always have this luxury but if you can, try and parallel the timeline for your conversations with investors. Having a few investors that are “far along” in the process will help nudge those that may be unsure. It will also do wonders in shortening the due diligence process and let you get back to what really matters, company building.
2. Timing, most investors have a predefined timeline for their fund, generally about 10 years. An investor will try to deploy the capital within the first few years in order to allow enough time to return the investment to their shareholders (in this case, the limited partners (LP) who invested in the fund). How can you gauge whether your timing is right? Off the bat, ask your investor a few basic questions, how many investments have they made this year? What fund are they investing out of and when did it close? These should give you a good indicator whether you are wasting your time or not. Another important detail to pay attention to in this climate is to be aware of whether the fund is having trouble with capital calls, the process in which the investors “calls” the money that was legally promised by the LPs. While the LP is obligated in most cases to transfer the money, some LPs who were severely impacted by the economic downturn may struggle to comply (say, if they invested in cryptocurrency…) and in turn this will impact the VCs ability to invest. No VC will be upfront with you about this, but a good indication could be if there is a very large gap in time since their last investment.
3. Avoid bipolar ups and downs. Tech companies over-hired during the boom time and now are laying off many thousands. Beyond the obvious damage to those that lost their jobs, this can also be soul crushing for a startup that is building its identity and culture.

When the economic recovery begins, they will want to hire back those workers. But the best of them may not return. If you can, you’re better off taking a temporary pay-cut until the next round or follow the pandemic strategy that was widely deployed of temporary layoffs. At the same time, avoid the euphoric hiring of staff that could be avoided. Your team will pay back such loyalty in spades.