We need to unlearn the lessons of the 2021 fundraising bubble


hand throwing old books into the trash; unlearn the lessons of the 2021 fundraising boom
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Immad Akhund


Immad Akhund is the co-founder and CEO of Mercury and an angel investor with more than 250 investments.

A tumultuous financial market, rising interest rates and an uncertain economic future are all infusing a certain flavor of pessimism into the market that is shifting the power dynamic back in favor of investors. The boom of the past decade, and especially the bubble of 2021, has pretty much faded away, and that means startups looking for investment need to adjust their approach and unlearn what they learned during the bubble.

I’ve invested in over 250 companies and founded an all-in-one banking platform for startups, and I’ve had a front-row seat to what companies at various stages are going through. I’ve noticed trends that point toward the old ways of fundraising becoming relevant again.

Below is a mix of best practices and advice I would give to anyone trying to raise money for their startup in this climate.

Don’t fundraise in the summer or winter

During COVID, VCs started taking meetings from July to August and even in November and December. But that was rarely the case before the pandemic. I’m seeing that changing now. It’s best to use the extra time you have now to prepare a solid game plan that you can set into motion when investors are around and engaged.

Have a deck and data room ready

Capital has been abundant in the past few years, which fostered a tendency to underprepare for fundraising.

Shortcuts are no longer a good idea. Those preparing to approach investors should have a deck, a data room and projections buttoned up before going into the meeting. This will let VCs do their due diligence and also show them that you’re serious.

Prepare to show more progress

No matter the stage of your company, there is the expectation that you’ll have made more progress than in recent years, so prepare to defend your progress. At the pre-seed stage, you should have a prototype. At seed, you should show revenue, and at Series A, you should probably have evidence to show product-market fit.

Find a lead investor

The trend of party rounds we’ve seen over the past seven or so years is shifting. Now, at the seed stage, startups should target lead investors who will price the round. This will take more time because it requires a more targeted type of networking, and it also raises the bar, because lead investors’ high dollar amount comes with greater levels of due diligence as well as higher ownership expectations.

Expect fundraising to take longer

This is becoming common knowledge, but it bears repeating: What used to take weeks is now taking months, so factor that in your runway plans and how much time you allocate to prepping for investors.

Don’t state your valuation, state your fundraising targets

Dilution is rising and valuations are falling. I’m seeing more Series A rounds that might have happened at $100 million now happening at closer to $50 million, and seed rounds valuing companies at $30 million are now more like $6 million to $15 million. In 2021, several fintech companies raised seed rounds at $50 million valuations with very little traction, but those times are gone — expectations are much higher.

Public market valuations for high-growth companies are down by 80%, and private valuations are down between 50% and 80%. Accept that, adapt your strategy and generally expect to raise less money. For this reason, ask for what you want to raise rather than stating your valuation, because it gives investors more room to place a valuation.

Plan for a shorter runway

With companies likely raising less capital, they will have to think about shortening runways from what once was three years to more like 18 months. Pay close attention to your burn rate and prioritize efforts that will advance product development or revenue growth. That will give you a stronger story to tell investors.

When you finish your fundraise, decide which metrics you need to hit to get your next one. Work backward from there to develop a month-by-month budget and metrics plan that outlines how you will get there. Give yourself at least nine months from the end of that plan to get your next fundraise done.

Don’t expect secondaries at early-stage companies

With the boom, companies were doing secondaries at the seed stage before they had really proven anything. Valuations were high enough and there was enough investment money around that they felt OK taking some money out.

With the downturn, secondaries are less likely, and even if they happen, they’ll happen much later, so don’t factor them into your plans.

Be selective with funding partners

Ownership and governance requirements will matter more again, so plan for that when you’re listing investors to pursue. With the move away from party rounds, lead investors will expect to own more of the company — perhaps not the 20% that had once been the case but likely 10%.

Regarding governance, VCs had given up their desire for board seats because they were competing against hedge funds, which typically don’t care about board seats. But with things shifting back in favor of lead investors, VCs will likely push for board seats again. That poses a risk to founders, because the board is the only entity that can fire a founder.

While we’ve been seeing less of that, it’s still an option. This means companies should pay attention to the history of a VC when choosing who to pursue and pick partners who align with their vision and values. In this regard, the economic slowdown is beneficial, because it’s making founders more selective about who they accept investment from.

Plan for slower growth and go back to fundamentals

Startups will take longer to grow. When there was more money available, companies could use it to hire more engineers, expand their sales teams and spend robustly on social media advertising. This accelerated growth allowed more companies to achieve unicorn status in less than five years when it used to take 10 otherwise.

If there is less money in the system, things will naturally slow down. But this isn’t necessarily a bad thing — having a lot of capital can mask problems and “buy growth” because there isn’t pressure to have an economically sustainable business.

Use this tighter market to prepare and ensure your business is scalable, and you’ll do better when fundraising. Also, be more selective when hiring. Ask yourself what the ROI will be before hiring for a role. Can you move forward with a smaller sales team or with fewer engineers? Is your pricing reasonable, and are you making money on each customer? Consider more long-term distribution models, like SEO, which can take a few years to pay off but are inexpensive when they do.

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