This past year has seen a wholesale shift in how the market feels about fintech. A year ago, nearly every investor had a fintech thesis, companies were racing to go public and investors at nearly every stage of the market were fighting to jam money into the hands of founders.
That’s not true any longer. The collapse in valuations on the public market has been extreme. A significant number of the biggest fintech companies to go public in the last couple of years are now worth less than the money they’d raised. And that drop in confidence has now permeated to all stages of the market.
Understandably, many early founders are unprepared to contemplate that the valuation of their idea — which will likely take about a decade to come to fruition — is now worth 75% less than it would have been six months ago.
But the long-term outlook of the sector remains unchanged for most investors and founders. The good news is, we’re still seeing deals getting done. The founders who are succeeding in this environment have adapted to the new reality quickly.
Money tends to attract money, so find ways to get the ball rolling.
Here are four strategies that the best early-stage fintech founders are now employing to fundraise:
Recognize that bid/ask spreads are going to be wide
It’s not you; it’s the market. The best founders recognize that the goal is to close a round, not to maximize the price or minimize dilution.
Minimizing dilution is good but not at the cost of losing a deal.
Plan for a long fundraise
While quick deals with proven founders and exceptional teams still happen, the average fundraising round, including diligence and paperwork, can now take up to four to five months. The days of the Notion-doc-over-a-weekend are firmly in the past.
Now that more time is being dedicated to fundraising, team management matters. Strong teams are delegating, setting goals and managing timelines so that they can hit growth objectives while fundraising. However, the flip side to a long fundraise is that you have time to demonstrate progress to investors.
Talk to lots of investors
The good news is that there is still more capital than great investment opportunities in the world. Companies are now talking to 50 or 60 investors as part of their fundraising process — more than double the number we were advising early-stage founders last year. Those relationships will pay dividends in the long term, but they will take time. And unfortunately, you’re probably going to waste a lot of time in conversations that don’t lead anywhere.
Take the money!
A common misconception is that companies need a “lead” for early financing or that they need to bring everyone in on equal terms.
That’s not true. Think about getting the ball rolling by opening up previous rounds to existing investors as well as new “high value” names. Reward investors who can help you build the business. There is no “standard” path right now, and you should take advantage of your supporters. Money tends to attract money, so find ways to get the ball rolling.
A few thoughts…
The challenge, of course, is that these tips will only go so far. If your business isn’t working, it’s critical to understand why and make adjustments as soon as possible — and that can mean letting your runway get dangerously low or making extremely difficult choices about how to preserve capital.
For founders facing serious business model challenges, the market has become incredibly difficult. In such circumstances, your best bet for capital is almost certainly your existing investors. But if your existing investors are pointing to problems you know are real and are not willing to support the business at any price, fundraising from new investors is probably a waste of scarce time.
Similarly, if you’re a very early-stage business, it’s likely a waste of time to try to look for acquirers, too. Instead focus that time (and cash) on improving the business and organizing the team around clear goals to try to address those issues.
Like many investors, we’re more hesitant to join extension rounds for non-portfolio companies than we were in the past. That said, we do remain interested in new deals, especially for companies that might be raising their first round of institutional capital. Our approach: relatively small initial checks of $250,000, followed by significant reserves for rapid follow-on investments that leaves us well positioned to both support our existing portfolio founders and partner with new founders. As such, our pacing so far this year — about 1.5 deals a month — is nearly identical to the years past.
Similar to many investors with a public portfolio, we’ve been fortunate to have the luxurious problem of witnessing the sharp decline in public valuations (and they’ve been humbling). It has also affected how we think about revenue growth and the composition of that revenue, even at the early stages.
As seed investors, we need our companies to be able to raise from an increasingly discerning venture- and growth-stage market. As such, regardless of the category within fintech — consumer or enterprise; embedded solutions or customer-facing brands; domestic or international — we want to see a path to revenue (ideally, recurring revenue) and some sense of how it will be defensible at scale.
Similarly, cost structures matter. In addition to keeping fixed-cost burn rates low, the CAC/LTV pitch that was so common in the last couple of years has fallen very much out of favor. Business models that rely on ever-increasing amounts of capital to spend on customer acquisition are going to be viewed very skeptically, even if payback periods seem short and long-term value looks high.
While everyone hopes that CAC will decline over time, in many cases the costs increase as the low-hanging fruit gets harvested. Instead, the best teams become experts at product innovation, providing — and getting — more value from customers and driving organic growth over time.
Above all else, as seed investors, the most important aspect we focus on is the strength of the team: their connection to the problem, their passion for their products and their desire to win over the long term. For founders who can persevere, we see huge opportunities ahead. We’re likely to see consolidation within the industry, creating more space for those that survive and the discipline that comes from running a lean startup can pay dividends for years.
Moreover, the macro conditions that make us so bullish about fintech remain: Financial services are still not nearly as digitized as they should be, most consumers and businesses are poorly served by existing players and the incumbents are structurally constrained in how they can respond and adapt to the threat of new competition.
The next few months, and probably years, will be harder than it’s been, but the rewards are still massive.