💸How to fundraise in a crash

Founders Factory Startup Bulletin #12

Jun 1, 2022

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Each month, we bring you a round-up of startup stories, key learnings from founders, and insights from the Founders Factory team.

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“We have reached what might be called the Golden Age of Startups.”

That’s what Pete Flint, general partner of Silicon Valley-based NFX, wrote in October of last year. And for very good reason. The number of new decacorns (companies valued over $10B) in 2021 was double that of 2020—30, compared to 15. On top of that, total venture investment grew by 92%, at an eye watering $643 billion.

It’s fair to say that the context has changed significantly. Tech stocks plummeted in April and May: the NASDAQ fell 13%, while the ‘Big Tech Five’ shed around $2.6 trillion in value. In recent weeks, companies including Klarna, Hopin, and Gorillas have let go of huge swathes of their employees.

Founders face turbulent months ahead. VC funding has historically dropped during recessions, with the number of funds and cheque sizes both diminishing. Founders will be worrying about funds drying up and having few options to fundraise. So how can founders raise during a market downturn? We collect insights from our operations team, as well as leading European investors.

In this month’s newsletter:

10 tips for fundraising during a crash
Earn a spot in front of our 14k-strong community
Our top recommended reads
Latest news from our portfolio—mega fundraises, award-winning founders & more

💡10 tips for fundraising during a crash

Last week, Y Combinator issued a message to their founder community, warning of the turbulent times that lay ahead for founders.

On fundraising—“If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan.”

Many founders, however, may not have the option not to fundraise. So we’ve collected advice from our team and a number of leading investors. One consistent theme—the fundamentals of fundraising remain the same regardless of the market, just some of these are more important than ever.

1. Plan ahead

Jean de Fougerolles, Managing Partner @ Ascension

Focus on your runway, at least 18 months, assuming zero monthly revenue growth. Then once you do raise that money make sure that you’re always looking at your runway and have time to raise your next round.

2. Optimise for cash in the bank

David Hickson, Chief Strategic Development Officer @ Founders Factory

If you’re raising at seed/pre-seed, I’d be much less concerned. At this level, we think in terms of 10 year horizons so temporary macro-market conditions are much less relevant. Seed funds that have raised funds over the last couple of years will still need to deploy.

Regardless of market conditions, cash is king. Without cash in the bank, your startup is undoubtedly in a worse position. Any fundraising process should have this front of mind.

There are a few things you should do to ensure this:

Don’t be too selective in who you accept money from. It’s likely your breadth of choice is narrowing at the moment, so don’t sit around waiting for the perfect investor.
Don’t worry about ‘losing control’. The focus is on the here and now: do what you can to help your business survive. There’s no point wasting time worrying about years down the line about your holding being diluted or investors trying to take control (which is extremely rare)
Expect some/all of your shares to be put on a vesting schedule. This is normal, and nothing to worry about. It makes sense from the investor’s point of view: they don't want to give you £1million, only for you to walk out the next day with 50% of the business.

Read David’s No Bullshit Fundraising guide

3. With that in mind…raise, even if you don’t need it

Brent Hoberman, Founder @ lastminute.com, MADE.com, Founders Factory

Entrepreneurs may love the idea for their business, but not understand the nuts and bolts of how to run it and manage cash flow, resulting in raising money at the worst possible moment: when you are running out of cash. The process can then become a scramble, terms unfavourable, and founders may end up having to lay off good people. If you can, raise money when you don’t need it.

4. Show good stewardship of your business

Camila Zattar, Venture Portfolio Associate @ Founders Factory

Indicate to investors that you have a good handle on your cost base and that you are employing your resources wisely (i.e. utilising creative strategies to make the most bang out of each buck). In ‘good times’, there's more of a ‘growth at all costs’ mindset, but now investors are likely to start wanting more of a view on costs, path to profitability, etc.

5. Hold up your hard metrics

Darren Mulvihill, Head of Venture @ Founders Factory

As always, your focus should really be on fundamentals—but now those metrics will come under particular scrutiny. Focus on things like revenue and growth. You’ve got to show investors how you can acquire customers to show that people are willing to pay for your product in this climate.

You’re going to be judged a lot more objectively as a founder, so you need to put your best foot forward. It matters less now if you are a particularly marketable founder.

6. Make full use of your network

Camila Zattar, Venture Portfolio Associate @ Founders Factory

Right now, lots of investors will likely be saving dry powder to lifeline what they view as their portfolio winners. So they may have less focus/bandwidth to go for ‘cold’ or ‘borderline interesting’ deals.

The best way to deal with this is to:

Do your homework and try to reach investors/funds for which your business is a slam dunk fit, rather than an edge case
Get some extra networking out of every meeting - i.e. if you feel like you bonded with an investor, but they may not be likely to invest, ask them to introduce you to others in their network (worst case scenario they say no, but likely will respect the hustle).

Also, pay attention to other people you know in your industry. Could any of them be helpful, or make any introductions? It's a good time to think differently!

7. Tap into your existing support

Valentina Shegoyan, Partner @ Reach

It’s going to be a lot harder to raise from new investors in this market. So make sure you have the support of all your stakeholders and investors on your current cap table. Be transparent with your board and your stakeholders, and that should help you to raise repeatedly from the same people.

8. Consider alternative funding sources

Edoardo Gentili, Venture Portfolio Associate @ Founders Factory

Think how you can increase your runway in case you don't get funding by the desired date. This will allow you to be in control of your business and not dependant on external parties. Also think of alternative sources of funding beyond VC, e.g. venture debt, revenue-based funding and angels, and start conversations with those early too, so it’s not left to the last minute.

9. Overcommunicate with investors

Darren Mulvihill, Head of Venture @ Founders Factory

Be transparent about how you’re handling the situation. Show investors what you strategy is, and what creative solutions you’re coming up with to handle a tightening of the purse strings. This will ensure that they’re aware of what you’re doing so that, when you do come to look for money, there are no shocks.

To a certain extent, you should make sure that investors are aligned with your decisions. For instance, if you’re cutting your product budget (or laying off a product team) in place of a sales team, investors will then understand why your product may suffer in the medium term. It’s less about justifying your decisions than about being fully transparent about the course you’re taking.

10. Treat every meeting as THE meeting

Camila Zattar, Venture Portfolio Associate @ Founders Factory

Respond to every email as promptly as you can. Prioritise investor interactions. If an associate/person guiding you through the hoops asks you questions ("rules of the game") in advance, LISTEN. It may sound obvious, but if you have fewer meetings it is definitely not the time to lose a potential investor to a ‘check-in-the-box’.

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📚What we’ve been reading

The upside of a downturn (Lightspeed Venture Partners) - reflecting on some of the potentially positive outcomes for founders during the current market collapse
Adapting to endure (Sequoia Capital) - advice from the Silicon Valley VC on how to manage your startup during uncertainty
How remote collaboration impacts innovation (VoxEU) - unpacking some of the science between distributed working, debunking the myth that it’s an obstacle to innovation
First 1000 - a blog/newsletter telling the story behind some of the world’s biggest startups and how they got their first 1000 customers
WATCH: Save your startup during an Economic Downturn (Y Combinator) - Michael Seibel (YC CEO & co-founder of Twitch) and Dalton Caldwell (YC partner)

💸 News from the Founders Factory portfolio

💰 Storyblok closed a $47 million Series B to build out their headless CMS technology
🔦 Shop Circle founders Gian Maria Gramondi and Luca Cartechini were named in Forbes 30 Under 30 in the retail/ecommerce category
💰 Guider announced a $3 million seed round to help make mentoring scalable and accessible in large companies
☀️ Solar tech disruptors Solivus signed a deal with Northampton Saints rugby club to turn unusable roof space into solar panels
🏉 NFT studio eterlast partnered with the Rugby Player Association Awards
🌊 We partnered with Blue Action Lab and Miami-Dade County to support ventures solving ocean and climate challenges
🥇 Lucie Marchelot Shukla, founder of Straight Teeth Direct, was named Dental Tech MD of the Year at the SME News Managing Director of the Year Awards
💰 Kaizan raised €1.1 million pre-seed funding to build out their AI-powered client success tool
🌳 Pinwheel announced its partnership with the Platinum Jubilee Pageant, supporting three sustainability projects in the UK

🗓 Opportunities for founders

Climate Tech Pitching Sessions (June 21st, apply by June 5th) - we’re working with Octopus Ventures and 30 leading climate tech investors to give green entrepreneurs a chance to pitch their business. Find out more & apply here
International Founder Office Hours (May - August) - initiative organised by Tech Nation and Blue Lake VC to elevate new immigrant or refugee founders and give them 1:1 access to leading VCs. Find out more & apply here

See you next month 👋

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The Founders Factory Startup Bulletin brings you a round-up of startup and investment stories, key learnings from founders, and insights from the Founders Factory team.