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Before 2021, the market was a real unicorn farm. It averaged 150 births per year, with startups achieving unicorn status in record time. Last year, venture capital financing (VC) reached $620 billion, more than double the previous year. But this fertile ground is becoming barren as challenging and largely unexpected headwinds – a protracted pandemic, war in Europe and skyrocketing inflation – hamper the growth of companies across all market capitalizations and industries.
The ongoing disruption of the supply chain and the Russian invasion of Ukraine are the two main drivers of the record high inflation. The Federal Reserve has responded by ordering its largest rate hike in more than two decades with plans for further escalation. Federal monetary policy could be an additional deterrent to investors watching overvalued startups get laid off, employee layoffs and high-profile falls.
This challenging investment climate was particularly strenuous for startups looking for fresh capital. Last year, startups were adorned with high valuations. But the ongoing impact of the pandemic and the outbreak of war in Ukraine have exacerbated 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 the current environment can be daunting. Investors contributed $144 billion in startups worldwide in Q1 2022. That was a 19 percent drop from the previous quarter, the largest percentage drop since Q3 2012. Q1 2022 also saw a decline in the number of deals completed to 8,835, down five percent from the fourth quarter of 2021. Investors support startups because of their potential. In today’s market, they are more inclined to invest money in collateral. The current climate makes it difficult for entrepreneurs — especially those whose startups have pre-revenue — to raise funding. Difficult, but not impossible.
Some startups have proactively reduced their appreciation, but you may not need to take advantage of this. Approach fundraising with the knowledge that today’s investors are looking for practicality rather than potential. The goal is no longer unbridled growth, but sustainable growth. In March 2022, my company announced that we had raised $22.2 million in financing. Below are some key tips that helped us in our endeavors:
1. Identify Market Need
In the past, investors may 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 tackle current issues. From citing stats to recording personal anecdotes, founders should make a case for market need by including relevant Total Addressable Market (TAM) metrics in their pitch decks. This is part of the motivation investors need to commit to a startup — and to clarify why your company can help solve a widespread problem that needs solving. In addition to market opportunities, founders and CEOs must also rely on past successes to: show credibilityespecially in the SaaS market.
Related: What Entrepreneurs Need to Know About Early Stage Financing?
2. Use supporting data
For startup businesses looking to make money, target data points that illustrate a clear market trend to validate demand for your product or service. Clear data on the size and preferences of your overall addressable market will help inform transparent conversations with potential investors and show the potential for sustainable growth. By drawing on past successes, you can tell your bigger 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 business, statistics from past performance 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, capable of effective money management as we weather lean times.
4. Outline your next steps
Just as politicians outline their first order of business when they take office on the campaign trail, startup founders can build investor confidence with a solid, well-articulated agenda. Create a watertight plan for value creation. Bet on lean operations. Be prepared to tell investors exactly how you would spend their money in the coming months.
5. Be agile and keep your options
Before closing our March 2022 financing package, we had several investment discussions, some of which did not materialize. In the end, we put together a financing package that consists of three different elements (equity, convertible bonds and standby facility). These appealed to a variety of investors while meeting our cash and liquidity needs at the same time. Casting a wide net worked for us and it can work for you too. Be sure to take advantage of networking opportunities, such as interacting with online communities and attending in-person or virtual networking events. You never know who has the capital or connections to get your dream off the ground. Or help keep the lights on while you close and bring in new business.
Related: Why Founders Should Embrace Debt Alongside Equity
Moving against the flow
We have no control over macroeconomic hurdles to fundraising, such as continued supply chain disruption, war, inflation and rising interest rates. However, founders can control how they position their company with investors. They can even use these circumstances to their advantage, depending on the product or service they offer.
If you’re trying to fundraise in the current economic and geopolitical environment, now is the time to expand your network, identify market needs, consolidate your growth plan, gather evidence of past successes, and effectively communicate your intentions to investors.
While it may seem unattainable, fundraising in the midst of a taxing macroeconomic environment can be achieved if you understand how to handle headwinds beyond your control.
Related: Want to Get a VC’s Attention? Make sure you do these 6 things.