You can’t open Techcrunch without seeing a memo from another VC or accelerator spewing doom and gloom about startup fundraising right now. To find out what’s really in the minds of venture investors we asked them ourselves. Here’s what we learned from two funds that are still in the market about how they are evaluating deals right now.
This last month or so has been a real doozy. We went from skyrocketing valuations and oversubscribed rounds to pulled term sheets and layoffs in what seemed like just a couple weeks. We are lucky enough at All Places to see this market shift from both sides: from our venture clients who are investing and our startup clients who are raising. We know it’s been on everyone’s minds.
So last week we “sat down” (each of us sitting at our respective desks staring into cameras) with two incredible investors who we are lucky enough to call clients: one on the equity side (Noramay Cadena of Supply Change Capital) and one on the debt side (Spring Hollis of Star Strong Capital). We asked them how they’re reviewing companies, what the chat is with their fellow VCs, and what their advice is to companies thinking about raising. Here’s what they had to say.
Path to Breakeven. The most-repeated phrase on our call was “path to breakeven.” More than ever, investors want to know how you are going to get to the point where revenue and costs balance out. They don’t just want to know that this is your goal (we assume that), but they want to know that you have developed a specific plan for achieving it. Fluffy words said with enthusiasm are less likely to cut it.
Focus on Unit Economics. Everyone is selling something. The question then is how much does each item cost. This seems like a basic question, but again, investors are now expecting much more specific, well-considered responses. You need to have data around what you are selling, how much it costs to produce, and how you plan to reduce those costs as you increase sales. We hope at least one person on your team is comfortable with spreadsheets because hard data is the new black.
Empathize. It’s important to remember that VCs aren’t just sitting on top of a pile of personal wealth–they answer to their own investors. Even family offices are frequently managed by a professional investor who reports back to the family. That means that an investor needs to be able to justify its investments. So what can you do as a startup? Make their jobs easier. Think about the presentation they have to make to their LPs and keep that in mind when you pitch. What does that look like? See above.
Learn to Love Questions. You may have noticed that investors are asking more questions and requesting more documentation these days. It’s probably not a great look to tell them you just can’t be bothered to put that all together. A better approach is to have the documents all set and organized in a data room. This doesn’t have to be complex–if you’re on a tight budget it can be as simple as a logically-foldered and well-labeled Google Drive. This will save you and them time, and the more you can reduce friction in the investment process the better.
I can sum this all up in three words: have. a. plan. That’s right. Have a plan, a good one, one that you’ve really given some thought to, and one that has real numbers attached to it. And then have a back-up plan for what you’ll do if you don’t raise the money. Maybe it’s a leaner team, maybe it’s focusing on one thing you’re doing well, maybe it’s debt financing (hello, Spring Hollis!), maybe it’s a bridge raise from existing investors. If you’ve started a business, you’re used to things not going exactly as planned. You’ve got this.