Just released: How to raise venture capital in 2023

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Drought-Proof Your Startup: Scaling Strategies When Investors Say No

TL:DR

Key Takeaways

Headlines have drawn attention to the downward trend in venture funding globally in recent years— with 2023 seeing the sharpest decline and the drought projected to continue in 2024. Rising interest rates and recently failed investments have caused investors to air on the side of caution. Instead, they’re choosing to be more selective, cutting fewer but larger cheques for startups with higher promise. So, with active investors switching up their tactics to serve their best interests, it’s essential for startups to adapt their scaling strategy and prove their resilience to serve theirs.

Understanding the Early-Stage Landscape

The venture markets of 2021 saw some record-high numbers as investors set their eyes on emerging tech. But the years that followed proved to be volatile. When stocks dipped and returns on investments did not hold up, venture capitalists reacted by tightening their wallets and startups had no choice but to tighten their belts.

Consequently, 2023 saw a wave of more than 191,000 U.S. tech-based employees layoffs and startups that were projected with high earnings began to take a nosedive.

Those events, alongside the pandemic, rise in the cost of living, heightened geopolitical tensions and overall economic uncertainty, have all contributed to the funding drought. But while publications focus heavily on the funding dip, there are firms sitting on capital, including those who benefited from bumper fundraising efforts in recent years.

They’ll be more selective and come to the table with tougher terms, but active investors are willing to fund startups who come prepared and show their worth.

Adapting Your Strategy

There is an air of optimism this year, with inflation on the decline and stocks up. Bull markets would normally influence investors to be more risk-tolerant, but many are still recovering from the turbulence of 2022. As a result, the bar is being set higher by VCs and startups adapting their strategy to meet those expectations are the ones moving past the starting line. Here’s how:

Shifting Focus

Outside of providing your value proposition, be proactive by giving solutions that can ease the fears that exist in today’s climate. By shifting focus to address investor’s concerns will create a nuanced understanding that works for the founder’s benefit. A subtle way of communicating that the plan takes that into account. This includes presenting a business model that prioritizes sustainable growth — and diffusing concerns over the possibility of fast spending fueled by a desire for rapid expansion. 

Exploring Alternative Funding Avenues

Access to funding exists through other channels, presenting alternative opportunities for founders who know where to look.  

Grants are a viable option that supports startups searching to grow without the shadow of debt. From private grants to government grants, there is a variety tailored to elevate businesses at various stages, including early-stage funding. Many of these are coupled with mentorships to guide promising businesses in the right direction while providing access to connect with other potential funders.

For example, Hello Alice, a small business that introduces entrepreneurs to new funding opportunities, is worth watching. In 2022, their partnerships with Tiger Global Impact Venture provided $50,000 worth of grants to early-stage female tech founders, like The Matrescene.

Keep in mind that many of these grants list requirements that are essential even to be considered, including demographics and type of business. Properly research grants applicable to the founder, the startup and the required funding stage. 

Debt financing is another excellent option for entrepreneurs. It’s an agreement between the startup founder and a lender, in which money borrowed will be repaid with interest over a set period. Companies can use the capital to invest in necessary materials and hire talented employees to get their business off the ground. This funding appeals to companies showing some profitability while in the early stages — giving them confidence in not relinquishing equity just yet.

Strengthening Your Value Proposition

As innovative a product or service might be, investors are drawn to startups that offer something valuable. That is usually determined through the unique selling proposition. Who’s the customer? What problem is being solved? What makes it stand out from the rest? Show a specific need is being addressed for a particular audience that tackles a particular market. 

A USP that communicates these three pain points needs to be anchored through proper research. Validate the value proposition by proactively researching the customer and the market. There is power in stats by displaying results through tools and visuals that paint a picture for interested investors. If they can see it, they’re inclined to believe it. 

Most importantly, investors aren’t just looking to fund ideas; they’re investing in the people navigating its growth, looking closely at the team’s experience, knowledge and passion for what is being created. Demonstrate the support system within the startup to reflect a team that’s all in and ready to make it happen.

Optimizing Your Fundraising Efforts

Some of the world’s most famous entrepreneurs were met with their fair shares of NOs and rejections from investors. Hearing it enough times can push anyone to want to throw in the towel. Including Jamie Siminoff, Founder of Ring, who was famously rejected on Shark Tank. But the opportunity eventually led him down a path that connected him with other investors and Jamie selling the company for over $1 billion.

It’s easy to just give up on all the traditional fundraising efforts at a time when more emotions are invested than capital. Scenarios like Jamie’s show that cultivating relationships is what builds startups. Every new connection can be a potential bridge leading to a funding opportunity.

Targeting the Right Investors

Defining a target investor is as important as defining a target customer. It involves a different style of research that will save time and resources. Begin by identifying investors aligned based on industry, stage preference and values. A quick search into their investment history will shine a light on the types of startups they’ve supported in the past. Scrolling through their social media platforms and presence online is a good way of pinpointing their interests, themes and values. All helpful information needs to be crafted into a pitch that speaks to their interest to keep them engaged.

Leveraging Networking Opportunities

Network! Network! Network! From large conferences to speed networking, there are multiple types of events catered to building relationships on and offline. Entrepreneurs from all walks of life and in various stages of their careers attend, knowing the value it serves in making connections to increase visibility. 

Consider leveraging relationships with family, friends and colleagues. It’s a small world in which connecting with an investor can exist through six degrees of separation. The biggest supporters of someone’s success are the network of people around them open and willing to give a helping hand. A simple pitch to a friend can trickle down to the ear of someone who’s interested in learning more and possibly investing.

Negotiating Effectively

Come prepared. Outside of just knowing the cost, revenue projections and margins, arrive well-versed in key terms and deal structures that are common in any early-stage startup funding agreement. It helps speed up the process when there is a common understanding of what is being discussed. In most cases, a term sheet outlining the preliminary agreement leading up to a potential deal will be created. It helps speed up the process when there is a common understanding of what is being discussed.

If scenes from Shark Tank have taught us anything, it’s to prepare for every scenario. Come in with a plan for each possible offer and terms that could be put on the table. Part of having control over the negotiation process is coming in knowing what is needed to make the startup thrive and what the company is willing to offer in return to get there. With that in mind, it’s worth seeking legal and financial advice to help cross the T’s and dot the I’s.

In today’s market, it’s important for startups to adapt their scaling strategy, optimize efforts and navigate through the noise to stay on course. While it might feel like a desert out there, it’s important to remember that every handshake is another road forged for the company’s future — droughts don’t last forever, after all.

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