The past couple of years were all about huge valuations and less about needing to prove peak operational efficiency across the entire business. Even if you didn’t experience this first-hand as a startup founder or employee, the sheer amount of funding dispersed just last year proves my point.
This year’s a bit different. In large part due to persistently high inflation, round sizes and valuations are starting to come down — or normalize.
As a CEO who successfully raised capital in Q4 last year and is actively raising another round right now, I want to share my observations and tactical tips with other founders looking to fundraise in today’s volatile market.
What investors aren’t interested in
To give you an idea of my data sample size, I met roughly 60 investors to raise both my seed and Series A rounds. About 95% of those investors were based here in the U.S. (mostly in Silicon Valley), and they came from a combination of private equity, investment banks and growth VC firms.
Based on my conversations, here are three things I’ve noticed investors aren’t interested in right now:
Investors right now really like safety and security products, life-saving drugs and low-cost consumables, because these are essential products and services.
Funding startup trends
Lately I’ve found most investors are looking for reasons not to invest. Common pieces of feedback for founders include, “Your churn is too high”; “You have too much revenue concentration from a single customer”; and/or “Your product has possible future regulatory risks.”
Businesses with lots of capital expenditure
If you have a capital-intensive business or go long stretches while being EBIT negative, you may find it hard to find a willing investor. Now is a terrible time to show a big loss in short-term operations.
Backing new companies
VCs are more apt to continue investing within their portfolio companies right now.
What investors are interested in
Don’t panic, VCs are interested in investing in right now, just in a few areas.
Here are two trends I’ve noticed in my conversations, along with a few things you can do to prove your startup lies in these areas of interest:
Startups that are efficient, have cash and are profitable
Investors want to fund startups that are cash-flow positive, operated well, scalable, efficient and profitable. I’ve adopted Bessemer’s GRIT measures, which help objectively demonstrate that a startup is well run and can scale.
These measures are a great example of how investors calculate efficiency, and they’re absolutely critical to demonstrate in 2022, especially:
Scalability and growth: The devil’s in the details here, so have your figures ready and accurate. An ideal growth rate is 300% YoY for the first three years, then 100% YoY going forward. VCs are going to want to see three years of consistent, strong growth.
Shorter sales cycles: Very long sales cycles in the B2B enterprise space can be challenging. The sweet spot VCs are looking for is about three months from lead to closing (six months is considered too long). You’ll also want to demonstrate a shorter time to integration for your startup’s product or service — i.e., a seamless customer set-up process.
Revenue per sales person: Aim for $2 million+ ARR per salesperson. So to reach $100 million ARR, you’re going to need to employ 40-50 sales people.
Investing in recession-proof industries
Investors right now really like safety and security products, life-saving drugs and low-cost consumables, because these are essential products and services even during economic turmoil.
So if your startup delivers food or medicine, or even saves people money on their electricity bills, highlight how essential your product or service is to satisfying core physiological and safety needs.
How to raise in this climate
Keeping in mind investors’ current areas of focus and the nature of volatile markets, here are seven tactics that are helping me successfully raise funding:
Plan to pitch 30 to 60 investors
You’ll need to pitch to many investors to meet the right person. More than ever, be sure to focus on pitching the investors in your specific industry and company stage.
Address feedback
Almost everyone in venture capital thinks similarly, so if you get the first five VCs to give you clear feedback on why they passed or what their specific concerns are, be sure to address those points in future conversations.
Some pieces of feedback, like, “Your product has possible future regulatory risks,” are out of your control, so focus on the things you can control, and fix them within the first two or three months of speaking with an investor.
Highlight your trajectory
Make sure you communicate how you plan to grow your business with your founding team to any investors you’re talking to.
Take a hardware-agnostic, pure SaaS approach if you can
If it’s applicable to your product or industry, adopt a pure SaaS approach, because investors will appreciate how this opens your business up to a lot of markets (both geographies and verticals). It is also an impactful way to demonstrate the scalability of your business.
For example, because my company can build software on anyone’s hardware, we’re already in 120 countries and are used by both consumers and businesses. VCs want to see ease of integration and how easily your software can be deployed with third-party hardware.
Maintain a low customer acquisition cost (CAC)
My company spends very little on CAC because of our B2B2C model (we sell to businesses that sell to consumers). This means every time we do a deal with one business, it leads to lots of downstream consumers with no per-CAC. So the acquisition of one B2B customer can lead to hundreds or thousands of consumers, which VCs love (as do I!).
If possible, highlight that your software is made in the U.S.
This is particularly relevant to startups in the security industry, as U.S.-made products that secure people’s lives are incredibly valuable for VCs right now, given current geopolitics.
What’s more, American consumers tend to feel more comfortable knowing your product and their data is built, stored and protected in the U.S. For example, I’ve found that when personal safety and security in their homes are concerned, people want to be sure their data stays within the U.S. and isn’t accessible by any government or third party.
Be persistent
All you need is one VC to say yes. An investor may overlook some of your startup’s challenges because they agree with your vision or trust that you can overcome the hurdles at hand. Even in today’s challenging market, the human-to-human connection remains powerful and promising.
Prove your ability to adapt
It’s not all bad news. Startups that are efficient and extremely low CAC have the opportunity to catch the attention of fairly risk-averse VCs. In particular, startups that address people’s safety and security needs can fare especially well, as the nature of such businesses provide blanket protection against a recession or slowdowns in the economy.
Looking ahead, I expect the market slowdown to hit the bottom by the end of this year, and we’ll see a return to growth in fall of 2023. Simply put, 2020-2021 was a bubble, with tech serving as a safe bet during highly uncertain times. This year represents a correction as other markets open back up post-pandemic, and the next two years will bring more normal valuations (like those prior to COVID-19) and a return to growth.
As valuations continue to undulate, the most important thing founders and CEOs can do is show investors that when an economic downturn hits, your startup can survive and continue to gain market share. No matter the year or climate, VCs will seek out agile operators and startups that can quickly and continuously adjust to changing market conditions.
Demonstrate your ability to go from aggressive to conservative while preserving the vision of your company, and you’ll be able to successfully ride current and future funding waves.