Getting set for sustainable growth in a tough funding environment
I’ve had quite a few conversations recently with founders on this topic but one recently stuck out. A co-founding team of a company I’m fond of (but not invested in) has 90 days of cash in the bank and has had 50+ investor meetings recently. While raising previous rounds was relatively easy for them, now... crickets.
It is a difficult situation, but it can be navigated. We spoke for a while and I thought I’d share the summary here in case it helps other founders who have raised previous rounds and have a revenue generating business.
What’s going on?
There has been a correction in the public markets which is now filtering to private markets
There is a potential recession looming and it seems unlikely central banks will intervene in the short term
There are a number of other issues at play impacting confidence (inflation, supply chain, geo-political etc.)
Investors have bigger funds than ever. Why aren’t they investing?
There has been an incredible amount raised by fund managers (across venture, private equity, private debt etc.) over the last few years but the above events have created a difficult environment for raising money for founders and have put pressure on valuations:
The previously popular method of creating private valuations based on public comps is unattractive at the moment
Confidence of investors has shifted, meaning higher thresholds required for new funding and (except for elite companies) potentially a new way of viewing valuation
We are seeing instances of investors pulling term sheets (and hearing about some investors not completing on funding commitments)
What should I focus on?
Work out whether you are Default Alive or Default Dead
Prioritise survival and maintaining control - make difficult decisions early
Understand the potential change (depending on your stage and growth rate) in how others will appraise your company (revenue vs free cash flow)
Consider if there are alternative ways to achieve customer-led funding (or increase your runway). There may be options available outside traditional equity
If you need to let people go, do it quickly and respectfully. Help them get other roles where you can
Ensure your updated operating plan is robust and has buy in - it either gets you to cash flow positive or to your next funding milestone (with a meaningful safety buffer)
Road test your plan with key stakeholders
Consider getting external input from potential next round investors as to what milestones they’d expect to see
Additional reading
Adapting to endure - Sequoia
YC advises founders to plan for the worst - YCombinator
The upside of a downturn - Lightspeed
39 Moves to Survive (& Thrive) in a Downturn: 2022 Edition - NfX