There’s no shortage of euphemisms we use to describe the unpredictable nature of hard economic times: rough waters, choppy seas, more grey skies ahead. The pandemic was one big storm of unemployment, consumer change, and market volatility. The entrepreneur raising capital, having survived its worst, is like the lone sailor stranded at sea, searching for direction.
Luckily, the data tell a different story. Instead of sinking, the venture capitalist (VC) market soared past a high of $300 billion in the final quarter of 2021. The space continues to grow and despite some who say investing will slow down, I predict another major year of VCs investing in blockchain technology, web3 and a whole host of other innovations coming to market. Increasingly, investors are fighting for exposure to earlier rounds of funding, and the space as a whole is becoming incredibly more competitive than it has been in the past.
The trepidation is understandable; it’s hard to understand how a market will bounce back. But the numbers never lie, and the VC investment space isn’t slowing down. For early-stage teams raising capital, it’s there for the taking if they walk the necessary path.
The Paramount Importance of Preparation
Even if an investor has capital available, it’s also likely the case that the risk of their portfolio at large has increased, quickly and unexpectedly. As many of their ventures face significant threats in the recovery era, it’s important that initial investor engagement shows incredible preparation and answers the pressing questions before they inevitably surface.
Ideally, assurance would come in the form of a strong cash position. But for early startups raising capital, eliminating costs like marketing spend, travel budgets, and taking a salary cut across the founding members might be required to show a commitment to remaining agile. Prepare too for the inevitable pivot question, and be ready to explain option B, C, and D when it comes to your response to the new problems that the after-COVID era may bring. Try to gather metrics that support your plan—a simple pitch deck won’t do as much as it might have 12 months ago.
Investors and entrepreneurs are watching all these strange market dynamics play out in live time, and smart investors will want to know why a startup has a chance in an industry that’s still recovering from economic shock. If peer companies in that industry haven’t recovered the positions they had to lay off, it’s all the more important that the entrepreneur is able to communicate what precisely they plan to do differently.
Casting A Wide COVID-19 Net
Deal structure is changing. As it becomes harder for investors to get a piece of cutting-edge deals, they’re adjusting their expectation. Some investors are starting to buy in to earlier seed rounds, and some are even investing in uncapped notes just to have the chance to participate in subsequent rounds.
For founders who have proven some success in a relevant field, they might be navigating that kind of influx of investor interest. It’s important then, even though there’s no shortage of capital, that the deal structure incentivizes investors to stay around for the long haul. If the best thing an early team can have is a capital reserve, a close second is mentorship. Uncapped notes might make sense, but make sure to give those early adopters a favorable deal in the subsequent stages, and consider allowing them to adopt the valuation that’s decided on in a Series B or Series C round.
Less experienced founders might have to use their elbows to get into the game and fight for investor interest. But as we approach what could be a lucrative, post-crisis economic boom, most investors are already on the look-out for the “next big thing.” Still, if an entrepreneur was planning a seed round targeted around 50 investors, it would be advisable to double or triple that number. This is not to say that the startup needs to take on more capital sources or dilute any more ownership shares. Investors still have the capital to make the right deals happen, but their attention is being bid on from multiple directions. It’s therefore a winning strategy to expand the funnel size and engage more investors, increasing the chances of finding an investor with a shared understanding and complementary objectives.
Longtime investors understand the opportunities of the moment. Startups that survive the potential coming recession will provide outsized returns. It’s a bet that most investors are interested in making, but it takes detailed plans, a nuanced pivot strategy, and proof of preparation to reel them in. Entrepreneurs should be encouraged to know that the capital is out there. And when it comes to finding the right investor fit, there are (still) plenty of fish in the sea.