Risk-averse investors. A stagnating IPO market. Layoffs and steep valuation markdowns. It’s no surprise that industry watchers are saying the party is over for venture-backed startups.
The carnage—caused by a confluence of factors—has also temporarily ended the party for value stocks, the bond market, commodities, cryptocurrencies and even havens like gold and real estate. It’s hard to be optimistic when terms like recession and bear market are thrown around daily and the retirement accounts of many Americans are a sea of red.
Startups are being hit especially hard, even those with the most groundbreaking technologies and operating in the hottest sectors. Even fintech startups, which led the pack by raising $134 billion last year, are likely to feel the pain in 2022. Belt-tightening is already hitting the sector, with a prominent VC saying recently that term sheets are harder to come by and that startups should think about raising smaller funding rounds.
But financial downturns don’t have to mean the party is over for everyone. Fintech startups will continue to raise funding this year because businesses still need new technologies to help them keep up with the pace of change. And whatever the economic conditions, investors still want to get behind the winners.
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It won’t be impossible for fintech startups to raise funding this year, but it also won’t be easy. For founders, it has never been more important to stand apart from the herd, demonstrate real-world value and display to investors a capital-efficient operation.
In 2022, VCs won’t just kick the tires but look under the hood before offering a term sheet. Ageras Group, the company I cofounded, has been through this process and has raised more than $100 million in good –and bad– macro environments over the last year.
Here are tips for fintech founders who want to follow the same path:
Get your house in order
In a hot macro environment, businesses with mediocre and even bad numbers might be able to get funding. That is not the case anymore. So before hitting the trail, be sure to have your company in order. Do you have healthy unit economics and gross margins? Are your sales and marketing teams efficient? What is your burn multiple (burn rate versus revenue growth)?
If your business fundamentals are bad, you might not be able to raise new funding on attractive terms, so you need to buy yourself time to improve the fundamentals by cutting costs. There is now way around it.
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The cap table is your holy grail
With funding getting scarce, it may seem like an odd time to be selective about who invests in your company. But finding the right fit is just as important in a bear market.
Giving away control of your startup to someone who does not share your vision, values or risk appetite means there will likely be serious problems down the road. You could, for instance, be forced to exit the company sooner than you want to.
For this reason, it’s wise to lean on personal recommendations in finding the right investors and due mutual due diligence. This is the way to meet industry experts who can bring value other than capital.
ABR: Always be raising
If there is anything a venture capitalist loves, and now more than ever, it’s a company that wants funding but doesn’t necessarily need it. If you want to be that company, strive to be “default alive,” or able to reach profitability with your current resources. The way to achieve this is to focus on improving your unit economics and minding your burn rate.
At the same time, you should always be in fundraising mode, whether you need the capital now or not. This means always responding to inbound interest and tracking all conversations. Consider raising convertible debt with a discount to a future round, as this does not tie your startup to a specific valuation. Always take the call. Take every meeting you can. Keep investors apprised of your progress. Even if you don’t need funding today, a smart forecaster always keeps in mind how quickly times can change.
Make sure everybody is winning
Financing and follow-on rounds can do a lot for your company, but these events also dilute the ownership stakes of the leadership team and employees. For this reason, working with investors is a complicated dance.
Make sure not to dilute employees to the point of harming morale and in case of a down-round, you could offer new options or reduce the strike price to keep them motivated. And if any investors from previous rounds are no longer driving value, try to find a solution for buying them out. It might feel counterintuitive to spend that vital new cash to buy out investors, but a clean cap table can be foundational for future success.
At Ageras, our first institutional investor bought out an angel investor who had a significant stake. We diverged from this angel investor’s vision over time, and the new investor was a better fit. The solution we found benefited everyone involved, and there was no acrimony because we found a way for everyone to get what they wanted.
This angel investor is still a good friend. This is what happens when you make sure everyone is winning.
Customer acquisition is more important than fundraising. Never forget that.
Never forget the core business
Never take your eye off the ball, even while fundraising. Too many founders focus entirely on selling shares to investors when what they need to be doing is continuing to sell products and services to customers.
Customer acquisition is more important than fundraising. Never forget that.
I learned this lesson in the early days of my career, when we were talking to a potential angel investor. Some of us took our eye off the ball during the lengthy diligence process and our growth decelerated. The angel investor took advantage of the situation by trying to negotiate a better deal, so we had to walk away. This was not a great place for a bootstrapped company to be, but it did provide a valuable lesson: Nothing is more important than your core business and losing sight of that is dangerous.
Times are tough right now, but they don’t have to be tough for every company. Fintech companies with solid unit economics, decent burn rates and which never lose sight of the core business can and will raise funding this year.
Downturns can be a time to shine. If history is any judge, many companies will do just that.
