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Capital raising landscape is changing: Five ways investors could shift strategy & how you can prepare

For equity markets, 2022 has been one of the worst starts in history, including the Tech Sector’s worst start since 2002. There have been several macroeconomic and geopolitical impacts that have shaken the markets this year, which has led to rise in inflation and a tightening from the Federal Reserve.  The CPI for the month of May headlined 8.6% compared to the expected 8.3% which caused  a more aggressive response from the Federal Reserve. Below, we explore what this could mean for private markets, how investors may change their strategies, and what you can do to stand out and increase your chances of landing a successful raise. 

What is changing with the private market landscape?

Over the course of the last 24 months, we have seen significant shifts in private equity.  According to this CNBC article published in May, “Prior to 2021, the market was averaging 150 unicorn births a year – startups valued at $1 billion or more. There were more than that number created every quarter last year.” 

Last year, during a time of low interest rates and period of Quantitative Easing, there was a lot of excess capital that private equity investors were looking to put to use. As a result, many startups may have been overvalued, as well as many that have exorbitant amounts of cash left on the balance sheets after large funding rounds.  

To date, we have seen public market valuation cuts spill over into private markets. There has been a decrease in the amount of liquidity that has been available for funding rounds. Expectations for future funding rounds could result in lower valuations, and slowing of frequency and duration of funding rounds. Startups may begin to burn through cash faster and their runways could become shorter.  We are also likely to see compression with slowing growth rates and discounted multiples going forward may not be as big as they were. 

However, while the landscape may be shifting, there is still likely to be a lot of capital available for funding in private markets. Many investors may alter their strategies to adapt to the new normal.

How could investors change their strategy?

Over the last decade, the number of new startups created each year has gone up, with 5.39 million created in 2021. This means that investors could still receive hundreds to thousands of pitch decks. As many investors begin to adapt to the shifting economic environment, here are five ways they could change their strategy

  1. Investors are likely to conduct more due diligence in companies. In 2021, there were more dollars that were available to invest in more projects. Many investors could make the shift to quality over quantity. 
  2. The total size of investment dollars could be reduced. For many investors, not only could the total pool of capital be reduced, but check sizes could also be smaller. 
  3. Seeking better terms across fewer deals. Over the last 12-24 months, investors may have been willing to take less favorable deals in order to make sure they were able to remain competitive to land a deal.
  4. Could look for more realistic and rationalized valuations. As the amount of liquidity is likely to decrease, valuations could follow. Investors could look for realistic valuations and revenue projections.
  5. Review their current portfolios and make changes. Investors may look at their investments to see who is set up to weather a storm that could be up ahead. The higher conviction names could have more weight as investors decide who they want their track record tied to.

According to this CNBC article, Deena Shakir from Lux Capital has been “advising companies in their portfolio to think long term, extend runway to 2+ years if possible, take a very close look at reducing burn and improving gross margins, and start to set expectations that near-term future financings are unlikely to look like what they may have expected six or 12 months ago”.  Startups that don’t heed advice from their investors may have a tougher road ahead. 

While these are some of the changes that could happen with investors, it’s not all encompassing. But, it can give you an advantage by knowing how you can stand out from the crowd.

How can you position yourself to stand out?

As the number of startups created each year continues to increase, you are likely to be faced with increased competition for decreasing investment dollars available. Here are five ways that you can best position your company to garner the attention, and possibly securing capital, for your raise: 

  1. Have a strong sustainable business model. For many investors, no longer will just a good idea be strong enough for an investment. Having a well thought out business plan that shows measurable data points and targeted milestones may be needed.
  2. Reevaluate growth rates. Realistic growth rates based on a reasonable cost to show where investment dollars will be going and projections based on spend will likely be desired. 
  3. Give more investor protections built into deals. Many investors may be more cautious in the risk they take with their deals. Providing more protections, such as Preferred Shares, into deals could help reduce their risk.
  4. Extend your runway until you’re ready for an IPO. The IPO window for late stage companies has closed dramatically and valuations are vastly different than even six months ago. Conducting another series round could give you the capital needed while waiting for a better market. 
  5. Partner with companies like Figure Equity Solutions who can help you prepare for your raise.

Figure Equity Solutions can help you with the changing landscape.

Figure Equity Solutions is a digital platform that can help you prepare for your raise at any point during your company’s lifecycle. 

Figure Equity Solutions can help you along your journey from:
Cap Table > Primary Raise (Reg D platform) > Liquidity for Series B or later.

A subscription to Figure Equity Solutions provides:

  • 409A valuations to meet investor expectations.
  • Next round scenario modeling to see the impact to existing equity holders (ex. Offering Preferred Shares for better investor terms).
  • Integrated cap table solution that can scale with you as you grow.
  • Access to a secondary marketplace to provide early investors and employees liquidity.
  • Launch a capital raise with the click of a button.

To schedule a demo and learn how Figure Equity Solutions can help your business, click here.