How Early-Stage Companies and First-Time Founders Can Raise Money During Economic Downturns

As a first-time founder, raising money during an economic downturn can be difficult. Below, I will provide advice based on my startup experience and conversations with venture capitalists, focusing on actions and mindset.

Actions

You always need to do the following items, whether you are raising money or not.

  1. Networking: During challenging times, building relationships is crucial. Attend events and webinars, and engage on active investment platforms. A warm introduction from past company or school connections can make a significant impact.
  2. Have a Recovery Plan: While the focus might be on surviving the downturn, also demonstrate that you’ve thought about how your business will thrive once the economy starts to rebound. What will you do differently? How will you capture new growth opportunities?
  3. Locate your company in the right location: To ensure the success of your company, it’s essential to position it in an ecosystem that provides adequate resources. These resources include skilled professionals with the relevant technology and funding from investors. For instance, if you’re establishing a technology-focused company, finding these resources in the Bay Area is easier than in other smaller towns across the country.
  4. Tighten Your Financial Projections: Make sure your financial model is conservative and realistic. Demonstrate that you’ve considered various scenarios, including worst-case ones, and have strategies for each. 
  5. Being frugal: One of the good qualities a lot of successful founders have is frugality. Being frugal doesn’t mean you don’t spend the money. Instead, it means you spend the money smartly, only focusing on the critical items like developing your product to reach the next milestone. 
  6. Bootstrap as Long as Possible: The longer you can operate without external funding and continue building your product to gain customers, the higher your valuation will likely be when seeking funding after the economy recovers. It also demonstrates resilience and resourcefulness.

During raising the money

  1. Target the Right Investors:
    • Believe in yourself and your ability to secure investors, even during economic downturns. Some investors may actually be more active during these times, seeking out undervalued opportunities. Take the time to research investors who have a track record of investing during downturns. 
    • To find the most suitable investor for your company, it’s important to target those who invest in your specific market segment. For instance, if your company specializes in biotech, it may not be a fit for investors who focus on enterprise software. To ensure a successful outreach, look at their portfolios to determine if your company aligns with their investment interests. If not, it’s unlikely you’ll receive a response.
    • To ensure successful fundraising, it’s important to target the appropriate investor for each funding round. Angel investors typically invest in the initial check or seed round, while institutional investors focus on Series A and later rounds. It’s advisable to seek out angel investors like family and friends for your first check, as they can typically provide investments ranging from $50k-200k.
  2. Offer Favorable Terms: To incentivize investors, it could be beneficial to offer more favorable terms, such as better liquidation preferences or discounts on convertible notes. Suppose your revenue cannot sustain you during a downturn. In that case, it may be necessary to lower your valuation to secure the next round of funding, especially if you had previously raised funds during a hype period. While it can be challenging to accept a reduction in valuation, it’s important to note that a down round can still have positive outcomes if you continue to develop your product, build customer support, and increase revenue. For example, Facebook experienced a downround after receiving $240 million from Microsoft in 2007. Now, it’s a $780 billion company.
  3. Consider Alternative Funding Sources: Consider exploring alternative funding options such as research grants, university competitions, crowdfunding platforms like Kickstarter, GoFundMe, and Indiegogo, as well as incubators, accelerators, and venture debt, in addition to traditional VC funding.
  4. Strong Value Proposition: During an economic downturn, some investors tend to be more cautious about taking risks. Therefore, it is crucial for your business model and value proposition to be well-established and sound. If you are in the early stages of your business and have a team of fewer than five people, it is vital that you accurately identify the problem your business is solving. Ensure that the problem you are addressing is a genuine pain point caused by a “broken” pipeline in a specific business flow. If your solution does not solve the actual problem, no matter how advanced or sophisticated it may be, your customers will not require it when the economic wave recedes. For those in the Series A stage, it is essential to demonstrate excellent customer metrics, such as customer satisfaction, engagement score, and adoption rate, with a high growth rate of these metrics. Depending on the industry, a revenue of $2-3 million is required to raise funds for the Series A round.

Mindset

  1. Be Persistent and Resilient: Rejections are inevitable and may occur frequently. It is crucial to stay persistent and resilient. Keep improving your pitch, take feedback into account, and keep contacting potential investors. Additionally, create a supportive and safe network to ease any pressure in the event of a setback.
  2. Adaptability is Key: Show that you can adapt to changing conditions by sharing stories of pivoting or making strategic changes in response to a downturn.

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