The contracting private tech markets are driving down the pricing and frequency of funding rounds, while inflation cuts into companies’ runways, meaning they are able to build less product and acquire fewer users with the money they raised.
It’s true that VCs are doing more diligence and being more cautious with their decisions. Some want to make sure their existing founders have enough runway to weather this storm so they are prioritizing these companies. At the same time, there are hundreds of millions earmarked for early-stage companies, and firms such as Lightspeed, Collaborative Fund, CoinFund and Menlo Ventures have announced new funds in the last few weeks. Later-stage capital is now being redirected to earlier stages to avoid being exposed to one- to three-year exit timelines due to short-term turbulence and, instead, investors are focusing on exit horizons of over seven years.
In this economic environment, I’ve been asked by many founders how they can raise capital successfully, especially by those who feel demotivated by how long the process is taking. I want to share what is actually happening within VC, myths about raising in this environment, and actionable tips for closing pre-seed to Series B rounds that have also been instrumental in helping me raise $100 million for our fund.
As a founder, how can you navigate this environment and successfully raise a round?
Any change is an opportunity to create leverage, and a downturn is no exception.
Don’t dilute yourself for more than 10%-15% in any given round
If you want to build a big company, you need to keep enough equity for the next rounds and for yourself so that you’re incentivized to continue growing it. Investors often require this in later stages. At the same time, don’t get obsessed with certain valuation mark-ups. If it’s taking ages to close at a higher valuation, raise money on the same valuation or terms as the last round, or in the worst case, a down round to ensure your company’s financial stability.
Optimize for quality of investors over volume
First, create a list of every investor you know who is a good fit for your round. Then, create a second list of founders and advisors who could introduce you to good investors. Rank them as tier 1 and tier 2.
Tier 1 can lead rounds and signal to other investors that they need to get into your company ASAP. Tier 2 are those you’ll prioritize going to after you strike out with tier 1s. As you map out these lists, think about how relevant their funds are to your company.
When requesting intros, the best way to stand out is by showing alignment with the right partner at a relevant firm. Introductions are about quality, not volume. It’s better to get 20-30 meaningful conversations than sending 200 cold emails that result in nothing. Figure out who from your network can give the warmest intro to an investor. Then create a purpose-drafted pitch for that particular investor to ensure you show alignment in your interests.