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Before 2021, the market was a veritable unicorn farm. It averaged 150 births a year, with startups achieving unicorn status in record time. Last year, venture capital (VC) funding reached $620 billion, more than double the year-ago figure. But that fertile ground is turning barren as challenging and largely unexpected headwinds — an ongoing pandemic, war in Europe, and sky-high inflation — hamper the growth of companies across market caps and sectors.
The ongoing disruption in the supply chain and the Russian invasion of Ukraine are two main reasons for the record high inflation. The Federal Reserve has responded by ordering the largest rate hike in more than two decades with plans for further escalation. Federal monetary policy could serve as another deterrent for investors watching overvalued startups suffer layoffs, hiring freezes and high-profile falls.
This strained investment climate was particularly taxing for startups looking for fresh capital. In the past year, startups have been graced with high ratings. But the ongoing impact of the pandemic and the outbreak of war in Ukraine have exacerbated this trend. Knowing how to navigate the capital markets under these circumstances can make or break a fundraising round.
How to overcome difficult macroeconomic factors and successfully raise capital
Fundraising in the current environment can be daunting. Investors contributed $144 billion to startups worldwide in the first quarter of 2022. That was a 19 percent decrease from the previous quarter and the largest percentage decrease since the third quarter of 2012. In the first quarter of 2022, the number of closed deals also fell to 8,835. Down five percent from the fourth quarter of 2021. Investors are betting on startups for their potential. In today’s market, they are more inclined to invest money in a safe bet. The current climate is making it difficult for entrepreneurs – especially those whose startups are about to make sales – to raise funds. Difficult but not impossible.
Some startups have proactively lowered their rating, but you may not have to resort to it. Approach fundraising knowing that today’s investors are looking for practicality more than potential. The goal is no longer unbridled growth, but sustainable growth. In March 2022, my company announced that we had raised $22.2 million in funding. Below are some key tips that have helped us in our efforts:
1. Identify the market need
In the past, investors may have been more receptive to injecting capital into a startup that anticipates future needs. However, as investors become more selective, they are prioritizing startups that are addressing current problems. From citing statistics to including personal anecdotes, founders should make the case for the needs of the market by including relevant total addressable market (TAM) statistics in their pitch decks. It’s part of the motivation that investors need to get involved with a startup — and show why your company can help solve a widespread problem that needs solving. In addition to market opportunity, founders and CEOs must also rely on past successes to demonstrate credibility, especially in the SaaS market.
See also: What entrepreneurs need to know about early-stage financing
2. Use supporting data
For early-stage companies looking to secure capital, focus on data points that illustrate a clear market trend to confirm demand for your product or service. Clear data on the size and preferences of your overall addressable market helps to have transparent conversations with potential investors and reveal the potential for sustainable growth. Drawing on past accomplishments can help tell your bigger story and present a track record (more on this below).
3. Quantify past successes
In the absence of hard numbers on your current endeavor, metrics from past accomplishments can help founders build a picture of future success. Founders with a track record of startup success are well positioned. They can convince investors that they are a credible force in the startup space, capable of managing money effectively during lean times.
4. Outline your next steps
Just as politicians outline their first agenda when they take office during an election campaign, startup founders with a solid, well-articulated agenda can boost investor confidence. Nail down a watertight plan for value creation. Commit to lean operations. Be prepared to tell investors exactly what you would be spending their money on over the next few months.
5. Be flexible and keep your options
Before closing our March 2022 financing package, we held several investment talks, some of which did not materialise. In the end we put together a financing package consisting of three different elements (equity, convertible debenture and standby facility). These appealed to different investors and at the same time covered our cash and liquidity needs. Wide web casting worked for us and it can work for you too. Take advantage of networking opportunities such as B. Participating in online communities and attending in-person or virtual networking events. You never know who has the capital or connections to make your dream come true. Or help keep the lights on while you close and find new business.
See also: Why founders should rely on debt in addition to equity
Move against the grain
We cannot control macroeconomic barriers to fundraising such as ongoing supply chain disruptions, war, inflation and rising interest rates. However, founders can control how they position their company towards investors. They can even use these circumstances to their advantage, depending on the product or service offered.
If you’re trying to raise capital in the current economic and geopolitical climate, now is the time to expand your network, identify market needs, solidify your growth plan, gather evidence of past success, and effectively communicate your intentions to investors.
While it may seem unattainable, fundraising can be achieved in the midst of a distressing macroeconomic environment if you understand how to navigate headwinds that are beyond your control.
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