8 factors to consider when fundraising during a downturn

These are challenging times, but this is not the first time I have heard that.

This year brought the first signs of skepticism and pressure on venture. In the past decade, we lived through an unprecedented run of optimism and climbing valuations, and the gut check we’re seeing now has been long in coming.

I have experienced two major financial disruptions in my career: the bubble burst in 2000 and the financial crisis of 2008. I ran a technology startup and a fintech startup through these times, respectively, and as such I have experienced the impact that such events can have.

The key difference between 2022 and previous downturns is that this contraction was anticipated for a long time, whereas the previous downturns were far more sudden. Markets have reacted, and valuation multiples for both public and private companies have been heavily compromised, leaving growth investors in fear of losing the opportunity to secure targeted returns.

Growth investors have become far more reserved when making new investments, and many are redefining how they approach valuations. Investors will likely remain on the sidelines for the most part as the markets settle and a new set of comparable multiples has been established. This might take a little time.

Similar to how public valuations impact growth investor returns, earlier-stage investors have also been heavily impacted. As an early-stage investor, we are always looking for a company’s path to eventual exit and the associated valuations. The most important next step is to secure growth investment, without which many startups won’t survive.

We recommend that companies secure 24+ months of runway with any fundraise today.

Early-stage investments are also tightening, as investors focus on lower valuations that accommodate revised paths to an exit, and on business health, which is now becoming more important than growing at any cost. The tightening of the public markets essentially has a domino effect that ultimately makes it harder for startups at any stage to secure capital.

It is more important than ever for founders to remain calm and be strategic. At M13, we have some thoughts about how founders should think about the market and their options as they navigate this period of volatility.

Below is a series of considerations that stem from both my direct experience in times of austerity as well as what we’ve learned from our existing portfolio today:

Investing timeline

Founders must consider a new timeline for the investment process. Last year, we would recommend reserving three to six months for fundraising, but we now recommend that founders plan for a six to nine month process for each round beyond early pre-seed.

Valuations and dilution

Founders should also be open to new considerations around valuations. The comparable valuations from last year cannot be supported today, and expectations should be managed. Dilution will be more of a concern and could drive a founder’s desire to raise less capital. This ultimately leads to more frugal post-funding strategies.