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The State of Fundraising in 2023
Perspectives from a VC, banker, lender, & finance executive
As market volatility continues into 2023, startup leaders are wondering what to expect should they need to fundraise in the next twelve months. Even as growth stage companies sharply cut costs, recalibrate spending, and pivot towards profitable growth, understanding market dynamics and investor sentiment can help CFOs position themselves for success at the negotiating table.
To give leaders in The Circle a more comprehensive view into the fundraising landscape in 2023, we invited an investment banker, a former finance executive, a lender, and a VC to share their perspectives: Bob Blee (Head of Corporate Banking, Silicon Valley Bank); Jane Dunlevie (Global Head of Internet Banking, Goldman Sachs); Stefan Gerhard (former Finance Executive at Skillz and 17-year investment banking veteran); and our own Mike Jung (Partner & Co-Founder, Founders Circle Capital).
More Down Rounds are Coming.
While 2021 was a banner year for later-stage financings and IPO issuances, rising interest rates and market volatility brought them to a grinding halt in 2022. “We went from 30-50 tech IPOs in a normal year, to 115 in 2021, and only 2 in 2022,” explained Jane Dunlevie. “Moreover, only 10% of companies that went public in 2021 are trading higher today than their initial IPO price. This interplay of valuation and IPO volume decline has made investors more cautious about stepping back into this market.”
As public market comparables drove down private market valuations, many of later-stage private companies that didn’t raise enough money to sustain themselves for the next few years are facing a tough choice: wait for the IPO window to reopen or raise money at a lower valuation (a “down round”). At Silicon Valley Bank, Bob Blee has observed that while burn rates are coming down across the board, many mid-stage companies still haven’t reduced headcount and may find themselves needing to raise money or risk running out of cash.
According to Jane, there are still reasons for optimism. For one, CFOs have begun adjusting their annual financial strategy toward the capital efficiency and operating leverage that public market investors want to see. Meanwhile, there’s still a healthy pipeline of later-stage companies that are IPO-ready and confidentially preparing to go public in order to raise growth capital or provide employee liquidity when the market improves.
“If macroeconomic conditions improve in the second half of 2023, there could be a swift IPO market revival, similar to what happened immediately following the 2002 and 2008 recessions. We’re navigating a very tricky time in the global economy, but when you pair better macro conditions and company fundamentals, it will give CFOs an easier setup when talking to investors about growth and operating leverage.” – Jane Dunlevie, Head of Global Internet Banking, Goldman Sachs
VCs are Resetting Expectations.
On the other side of the negotiating table, VC’s are also being much more cautious. While venture firms raised record amounts of money in 2022, venture capital deal volume has dropped dramatically. Firms are sitting on a good amount of dry powder, but various factors are holding them back from deploying that capital.
“In 2022, the biggest disconnect was between the valuation that companies were hoping to raise money at and what public market comps suggested they might be worth,” explained Mike. VCs are trying to normalize valuations based on the realities of the public markets.
To get comfortable deploying capital, Mike believes that VCs will pay much closer attention to metrics that indicate efficient growth, particularly from a unit economics perspective. “If your net dollar retention rate, customer lifetime value, and contribution margin payback on customer acquisition are healthy and efficient, a VC will be really excited to talk to you,” he said. At the same time, VCs will be looking for any risk factors impacting the end market a company serves, or any COVID-inspired revenue growth that could potentially go away as the market normalizes.
Perhaps most importantly, VCs will be looking at whether or not a company is raising enough money to avoid another funding round in the future.
“Companies that raised on high valuations and aren’t fully funded to either profitability or an IPO are going to have a really tough time raising additional capital because no one knows what the next set of terms will look like two, three, or five years from now.” – Mike Jung, Partner & Co-Founder, Founders Circle Capital
Mike added that VCs may look to avoid deals with overly-complex liquidation preferences, investor protections, and capital structures. For the same reason, he believes some VCs are less inclined to write a term sheet for a down round because of all of the headaches that come with it. However, down rounds will be the only survival option for many startups in this market, and CFOs need to embrace that reality.
Debt Financing is on the Rise.
As valuations continue to decline and companies seek to avoid down rounds, many are already turning to the debt capital markets as an alternate source of financing. “The debt markets are open, and if you take on debt responsibly and with the right partner, it can be the right idea,” said Bob.
Bob cautioned that as demand rises and supply shrinks, lenders will set a higher bar for who they lend to – and how much they’ll lend – in order to avoid downside risk and potential regulatory scrutiny.
“Lenders are doing deeper diligence on companies, asking for more deposits, and looking for greater certainty around revenue and efficiency. They’re shying away from more cyclical and unpredictable sectors and showing preference to companies that have raised money more recently.” – Bob Blee, Head of Corporate Banking, Silicon Valley Bank
When it comes to company fundamentals, lenders will show preference to companies that are tracking well against their KPIs and growth milestones and have defensible gross margins. Strong equity value and debt-to-equity value ratio are both important health indicators, as well as a multi-year cohort analysis that shows a predictable path to profitability.
Successful Fundraising will Require a Solid Plan.
In order to fundraise successfully in this market, CFOs need to take a long view and craft a compelling story about their company’s current plans and future growth. Veteran finance executive and CFO|Circle member Stefan Gerhard shared these guiding principles, shaped from decades of fundraising experience:
- Build Investor Confidence – Market dynamics aside, nothing builds investor confidence in an investment opportunity like seeing you hit your numbers. Having a clear narrative on past performance and near-term proof points that demonstrate you are on plan is essential.
- Have a Plan A, Plan B… and Plan C – Remember that in volatile markets, deals can fall apart at the last second for any number of reasons. Having multiple options running in parallel can help increase the likelihood of success, and potentially at better terms. “Don’t try to pick your partner or become enamored with just one investor – the right partner, right fit, right personality will find you through the process,” said Gerhard.
- Stay Aligned With Your Existing Investors – Before going out to the market for financing, consider an inside round with existing investors that can bridge you to the key next milestone or when the market is more constructive.
- Don’t Set a Valuation Expectation – In these types of markets, leverage shifts to the investor. “Setting a valuation expectation in this market is a quick way to end a conversation with an investor before they really learn about the opportunity,” said Gerhard.
- Avoid Taking on Debt to Fund Operating Losses – While debt can be a short-term bridge financing solution and provide leverage during investor negotiations, avoid using it to fund operating losses or as a reason to defer making hard business decisions.
“Most importantly, if you run a good process but don’t like the price, you always have the option to raise less money and take less dilution.” – Stefan Gerhard, former Finance Executive at Skillz
Mike and Jane also emphasized the importance of transparency and open communication with your employees throughout the fundraising process. “It’s helpful to remind your employees of the valuation realities of what’s happening in public markets,” said Jane. “Being transparent about where the company is and what you’re trying to accomplish can build goodwill and trust with your employees,” added Mike. Bob also noted that as liquidity pressure starts to build among your employee base, secondary liquidity programs can be an effective retention tool between fundraising rounds.
As market uncertainty continues, private company leaders should revisit their fundraising strategy and evaluate different financing options. VCs, investors, and lenders will likely exercise more caution and favor businesses with solid fundamentals and a defensible path to profitability in the next few years.
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