Fundraising in the Venture Snowpocalypse
Opinion Piece by Bart Emery, JD/MBA
Colorado just got a lot of late season snow, and words like “Snowpocalypse” and “Snowmaggedon” were thrown around. After digging everything out, I realized that I can’t really think of a better metaphor for Seed-stage venture right now. ChatGPT’s suggestions were far worse too (Navigating Choppy Waters and Thriving in the Funding Jungle?).
In our healthcare world, there are still some bright spots. We’re still seeing lots of first-time founders getting funded, there have been some red-hot rounds, and newer VCs have been able to raise their 1st or 2nd funds. But overall, signs are beginning to stack up that it is a blizzard out there, and it might be a long winter that will hurt early-stage funding for years. I’m not just talking about terms getting a little more investor friendly. In the past month, I’ve seen investors walk entirely on companies that looked like they were on the upswing, and venture funds softly starting to scale back the team or quietly close up shop. I even know a founder who just “noped out”, returned investor money that he had just raised, and took a corporate job- a decision I respect immensely.
Alright, enough doom and gloom. You’re a startup founder and there’s no going back at this point. What can YOU do TODAY to survive snowpocalpyse, close that round and move onto actual startup stuff, i.e. actually running and growing a successful business?
Don’t Ignore the Forecast.
Just over a year ago, the hard sell was a viable tactic to drive a higher valuation and fast close. More power to founders who can pull that off right now, you know who you are. But for most, the hard sell isn’t likely to land you anywhere right now.
Put yourself in an investor’s shoes. They have money, deal terms are improving, and there isn’t rabid competition to get into good deals. So, most will take their time, get to know you more, and run a longer diligence process. You are not likely to fool investors into thinking it is still summer.
Tone and approach can make all the difference. In sunny times, the conversation can be enthusiastic around growth and promoting a fast close. Now, you’ll have to dig deeper and highlight your resourcefulness in reaching key milestones.
Convey that you’ve looked outside, and have at least pulled out the winter coat. Avoid the awkward follow up conversations where you’re going on week 12 of a 2-week close, where that term sheet is coming in any day now, or where your committed lead and co-investors are suddenly not so committed. Nothing will make an investor roll their eyes harder, and they will happily keep sitting on the fence.
Get Hit With A Smaller Snowball.
What is the correct amount to fundraise? There isn’t a right answer or magic formula. The best I can say is that it is the amount that minimally dilutes you while getting the company to the next financial event in the best shape for a high valuation, whether that is the next venture round or an exit.
In an adverse fundraising environment, you accept worse terms. The impact of those terms on your ownership is reduced if you take less money. But it isn’t that simple- if you don’t raise enough to meet your milestones, you’ll probably be back in front of your existing investors begging for those same terms. In the current climate, bridge rounds are a golden opportunity for investors to beat you up because you are struggling and will have difficulty finding new sources of capital.
You don’t want to be there. Accept that you may take a snowball to the face, and look to minimize the pain. But raise an amount that could get you to interesting milestones. At the early stages there are typically stops around first revenue, $1M, $5M, and $10M ARR, or development and FDA events for bio/medtech companies. Really get to know your projections and milestones, and track against spend.
If you do have the opportunity to raise a bit more than you need at the valuation you want, or you can add onto that favorable round, GO FOR IT. Some cushion is nice, and there’s not much downside compared to not raising enough. Many (or maybe even most) top tier venture-backed companies have been doing that for the past year or so.
Finally, understand that you might have to deal with whatever set of investors for a lot longer than you plan. If you get to be selective, be mindful that you’re adding the type of investors who have a track record of sticking around for the long term, and don’t have a reputation for walking on companies or feasting on punitive bridge and down rounds.
A quick plug for Inflect Health — we take a long-term view and will often start working with companies at a bridge round or extension. Generally, these have been founder-friendly terms, and we’ve followed on as many as 6 (!) times in a company, sometimes significantly upping our investment. And we’re only going on year 5. Plus, there is the whole strategic support, connections to the next level of capital, etc… it is safe to say we’re the type of investor you want in your corner!
Don’t Go Joyriding.
The best thing you can do to look like a good company is to be a good company (duh). All startup people are naturally optimistic about what can be accomplished and on what budget and timeline. There is a strong tendency to pitch taking over the world.
There is also the tendency to show what a high roller you are, whether it be a fancy office or buying expensive wine at that investor dinner. But it is a bit odd to be out in shorts throwing benjis in your driveway while investors are gathering their snow shovels and peering out the windows at you. Even if you are optimistic and have a good case for it, the strongest indicator of future success and financial stewardship is showing pipeline and revenue in your 1st vertical, tight control of your burn rate, and a clear understanding of what milestones you’ll get to with this round of investment. It also isn’t a good time to pitch a big increase in burn going after new product and service lines, unless the return on investment is well proven with some initial traction.
Now is a time that venture investors return to basics and aren’t wooed by flashiness. Understand that there are shifting dynamics on the venture fund side as well- they have their own partners and investors who are likely scratching their heads about the excess of the past few years and demanding accountability. Do whatever you can to help them tell that story, and expect deeper dives into anything that could look like an excess. If that doesn’t convince you to control your burn, also remember how terrible fundraising can be.
Make Sure Your Team Has Their Jackets On.
One thing in this world is certain- when things start looking iffy outside, everywhere else starts looking a lot sunnier. Of course, your best, brightest and most valuable employees are looking at catching a flight out, and the rest are nervously looking outside.
I would think about who is near and dear to you, and make sure they are taken care of during Snowpocalypse. There’s no replacement for big ticket items like salary and stock options for key employees, but a little can go a long way too. The sudden loss of a key employee is one of the most glaring red flags for investors, and if it happens during the round it could be a no-go. It is also easy to impart a feeling of doom-and-gloom that permeates through the ranks. Little things like not restocking the fridge, cutting PTO, travel and fringe benefits, and not having the annual get together are death by a thousand cuts. Feelings are your job, and you should at least try for an air of cautious optimism, while sprinkling in enough realism that employees don’t think you’re also looking for a flight out of town.
Wrapping Up.
Yes, it is tough to fundraise right now, and no, it doesn’t look like the storm is just going to blow over. But if you recognize that it is snowing, you’re smart about adjusting your pitch and ask, and you run a tight ship while taking care of your team, you have a better chance of not being taken out by the Snowpocalypse.
