How to do it (fundraising in 2023)
How to do it (fundraising in 2023)
"Risk comes from not knowing what you're doing." - Warren Buffett
Upcoming Event
We are excited to co-host a fireside chat with Mathieu Baudet, founder and CEO of Linera Protocol, with SignalFire, OnePiece Labs, and NEAR Foundation SF.
Time/ Date: Tue, Feb 2, 2023, 5 pm PT
Location: 501 2nd Street, Suite 100, San Francisco, CA (SignalFire office)
Linera Protocol was started by a team who previously helped create Libra’s payment protocol, FastPay, at Facebook. The team just published their whitepaper here.
At this event, Mathieu will share his vision of the protocol’s innovative technology, followed by a networking session with a group of developers in the Iterative community.
RSVP here to guarantee your spot.
Fundraising in today’s market
Due to the cash-rich bull cycle in the last few years, the startup failure rate was at a historic low, with many companies securing subsequent rounds and a record number of new startups freshly born each year.
However, many investors increasingly expect the startup shutdown rate to shoot up — triple or more in magnitude — in the second half of 2023 and into 2024 once the dry power eventually runs out (source: Pitchbook).
Undoubtedly, it will take more than a pitch to fundraise in this environment successfully.
With our last piece, “Do it,” we wanted to follow up on *how to* do it beyond the bravado.
We reached out to Wayne Hu, General Partner at SignalFire, Julie Zhuo, founder of Sundial, and James Wong, founder of XP health, to share their perspective and experience on successfully fundraising in this environment.
Demonstrate a clear path
Investors’ sentiment has now shifted towards looking for a faster path to profitability as sustainability is now the name of the game (don’t die).
Wayne corroborated this by mentioning that startups should “demonstrate a path to profitability,” packaged in a well-rehearsed pitch in a bullet-proof data room, in his latest video: How to raise venture capital in 2023.
Thus, being prepared and having a crisp pitch delivering what investors should care about effectively is more critical, rather than hypothetical growth metrics in a shiny slide.
A couple of tips offered by Julie include:
Practice your pitch with friends/people you know in the industry: Even folks who don't know your space well can give you feedback on the flow of your story and whether it's understandable. But, more importantly, this gives you chances to familiarize yourself with how you tell your story.
Ask yourself: "What questions do I hope the investors don't ask me?" Those questions indicate areas you haven't fully resolved in your own head, so spend time digging deeper until you feel you have a clear answer to your game plan.
Proactively pre-answer the tough questions in your pitch: It shows a high level of self-awareness.
Understand Investor’s Mindset
Another note to better work with investors is to understand what they want. To start, it is important to “research their fund and everyone you’re speaking to ahead of time,” as mentioned by James.
Every investor has certain beliefs and cares about certain goals, whether to enable massive digital assets adoption, build a more sustainable future, or better support a particular demographic.
Key questions to ask include:
What’s their fund thesis?
What do they write in their blogs or social media content?
What did their fund(s) invest into?
In addition to conducting research, it is just as important to attentively listen to investor feedback, “especially the unspoken parts,” as mentioned by James, as there may be points that investors are looking for that are expressed in a less than straightforward way.
Start from a position of strength
Furthermore, as attested by our experience at Iterative Ventures, fundraising is a momentum game that needs to be built up.
To do this, Wayne has advised that startups should seek extension rounds with existing investors and, preferably, get a term sheet before going out to new investors. This demonstrates that there are already investors in the round mitigating risks for those who may not otherwise know you as closely.
In addition, this also puts founders in a position of strength as there is already capital secured and gives founders better negotiating power.
James also shared that “finding the first lead investor takes 90% of the time and effort. The remaining 50%+ of the round typically comes with much less effort”.
Keep going and go beyond the existing network
Finally, as James mentioned, fundraising is a “numbers game”; a founder will likely have to pitch to tens, if not hundreds of funds and angel investors, before landing the first yes. You cannot be discouraged by no’s.
It is important to note that there may be a plethora of reasons why an investor is not coming into this round that may be out of a founder’s control. However, what is important is to keep that conversation going while continuing to look for new sources of capital.
As mentioned by Wayne in his video, you may want to:
Looking into your alum directory (like us!)
Check out what former colleagues are doing
Ask your existing investors to introduce you to other investors
Look for strategic investors for whom your idea matches their appetite
It’s also important to note that different investors have different ways of looking at an investment deal (e.g., acquisition target, strategic investment), and a founder needs to be prepared to accept less friendly terms.
This is because different types of investors, such as private equity firms, may place more emphasis on downside protection (2-5x return but downside protection, liquidation preference, positive cashflow, etc.) as opposed to maximizing the upside as typical for what venture capital funds are looking for (very few startups generating 100x+ return in the portfolio).
New Investment Opportunity
Sundial
Sundial is an automated insights product founded by former Facebook executives Julie Zhuo and Chandra Narayanan. Their mission is to empower organizations to make better decisions with data.
Current and previous recent investors include Sequoia Capital, F7 Ventures, Unusual Ventures, Slow Ventures, Tribe Ventures, Brian Hale, Avichal Garg (Electric Capital), Fidji Simo (CEO of Instacart), Howie Liu (Co-Founder/CEO of Airtable), Deb Liu (CEO of Ancestry), Brain Hale (VP Growth at Doordash).
Please follow the link below to find out more about the investment opportunity:
Supporting our community
As many, including many of our friends, are affected by the recent lay-offs at various tech companies, please feel free to reach out to us at team@iterativeventure.com.
During the Meta lay-off in November, we circulated this sign-up sheet with partner VCs and portfolio companies we work with and made multiple connections. We will continue to support our community, so please encourage folks affected to sign-up.
Interested in exploring the next opportunities with our community’s portfolio companies and partner VCs? Please get in touch with us through the link.
You are not alone. We will get through this time together. Keep iterating. 💪