Many of you have undoubtedly noticed that, in what seems like no time at all, startup fundraising has dried up. We’ve been speaking to founders and funders about this very thing and have some insights you may find interesting (we certainly did).
The fundraising environment is a fickle beast. In one moment it's ravenous, with constant talk of all the dry powder out there in search of investment opportunities. Anyone can raise a million dollars (particularly anyone on Twitter). You don’t even have to have a product . . . or even an idea! Just be your amazing, charismatic self and people will be throwing money at you.
Then in the next moment (or, in this case, two weeks later), the well has run dry. Everyone’s public portfolio has plummeted and check books are closed. An investor that reached out to you one day will not even respond to your email(s) the next. You were feeling like you finally had this fundraising thing figured out and now you’re doubting absolutely everything.
In reality, things are never so binary. In any environment, some great ideas don’t get funded, and some terrible ideas (or teams) receive heaps of praise and are slick with cash. But there is a general consensus, backed by data, that startup funding has dropped off by nearly double digits. In the last few weeks alone we hosted one event for founders and one event for GPs, and this topic arose in both. It’s on all your minds, so I wanted to share with you what I have learned from the All Places community.
What is happening? Public markets have been struggling. As those prices drop anyone with a public portfolio is seeing their net worth (and particularly the liquid part of their net worth) drop as well. That’s going to be most investors, large or small, angel investors to public pension funds to endowments to private funds.
How is this impacting startup fundraising? There has been a constriction for sure. In the last month we’ve heard from many, many founders who were either mid-raise or considering starting a raise who have felt demand weaken. This is not just a direct result of the constriction mentioned above, it is also the indirect result, as investors now see valuations drop and want to wait to invest until things bottom out.
What about fund managers who are raising? Not surprisingly, fund managers are having the opposite experience. With the sense that startup valuations are coming down, private investment funds are becoming even more appealing (because they’ll be getting good value when they do invest!). Our fund clients who are raising money have not experienced the same shift in investor sentiment. Don’t get me wrong, it’s still hard as f*ck to raise a fund. But the last month hasn’t made it any harder.
I’m a founder and I’m losing it! What should I do?!? While it may not seem like it, there is still a ton of money out there being invested. But when you are raising capital, even the slightest weakening in demand feels epic, so I get it. Our advice is to hone in even more pointedly on the two things that are always key. First, be mindful of when is the right time to raise for your business. Just because things are a little soft right now doesn’t mean you should postpone your raise. Now may be exactly the right time for you. Second, your story needs to be tight. Why are you doing this, how is it going right now, and how will it be going six months and a year from now? This needs to be tight tight tight. Compelling ideas do not stop being compelling when the fundraising faucet is turned down, but you may have to get even better at explaining why your idea is exceptional.
Starting a business is hard. Running a business is hard. Fundraising is hard. You didn’t get into this because you thought it would be easy (or, if you did, I’d imagine you were quickly disabused of that notion). And as we’ve all been reminded during the last two years, sometimes when things get even harder, that’s when the true magic emerges. Fairy dust fairy dust fairy dust.
P.S. Are you working with an accountant you love? We're always looking for great recommendations for startup or fund accountants. If you have a name to pass along, please drop us a note at firstname.lastname@example.org!