Fundraising amid uncertainty

The fundraising landscape dried up towards the end of 2022. Going into 2023, startups looking to raise capital face a somewhat mixed outlook. 

Given that many funds didn’t deploy much (if any) capital in the last quarter, there is a lot more dry powder than usual: over 2023, most funds will have a lot more capital to invest than usual. However, many startups delayed fundraising over the last few months, meaning a much larger number will be going out to raise this year. In sum—there’s a lot more capital, but a lot more competition.

One of the key challenges founders will have to face is a considerable knock to valuations. Just as we saw a number of large companies raising ‘down rounds’ in 2022, VCs will continue to take advantage of the market conditions to write cheques in exchange for larger chunks of equity. Camila Zattar, venture portfolio associate at Founders Factory, believes founders need to be far more flexible when thinking about funding this year. 

Founders will know that they’re going to be excessively diluted if they raise a large round, so will therefore be drawn towards taking smaller rounds (likely driven by alternate funding sources) until they can raise at higher valuations again. Other founders will have to accept funding at far lower valuations. 

“This creates a fundraising chasm: either you go for a large round and face excessive dilution, or you roll-up small VC investments with other different sources of funding to reach a lower level of financing,” Camila says. 

Flexibility is key. Founders unwilling to see their stake excessively diluted should consider what is the minimum level of funding they need to help them hit certain milestones (e.g. if you need a product building, how much will it cost you to hire a CTO). Beyond this, they might create certain ‘stretch goals’— “If I raise more, then this is what I can do”. 

Founders should also broaden the type of investors they are speaking to. Make sure you are networking well in advance of your raise, building relationships and rapport with investors before you need to ask them for money. Micro VCs will play a much bigger role here, as will angel investors. The latter in particular are much more relationship driven. 

At the same time, tap up your existing investors. Most VCs will have follow-on funding in reserve for their portfolio: they already have skin in the game, so are more likely to support you. You might also want to speak to your current clients, who have first-hand validation of your business model and are therefore more likely to write you a cheque. 

Pay particular attention to how you are selling your business too. It may be that you have to pivot your pitch: Web3 startups will have a particular challenge in emphasising the long term, stabilising benefits of crypto and blockchain technology. It’s been hammered home before, but showing your path to profitability is key. This doesn’t mean having an exact date when you’ll break even, but rather showing that profitability factors into your business model.

Navigating new policy and regulation

Government activity can have a huge impact on the success of startups: navigating this is crucial for founders. Policy and regulation has a variety of impacts, from building public confidence to incentivising activity and investment. 

One area that will see enhanced regulation in 2023 is crypto. The collapse of crypto exchange FTX was a huge impetus for regulation, with action needed to install stability and security in a market rocked by controversy. For many, this is controversial: crypto’s unregulated nature is part of the appeal of investing. 

For Timur Csilik, founder of NFT valuation platform Nabu, regulation is overwhelmingly a good thing, restoring confidence for mainstream investors into crypto assets. “We’re going to accountancy firms, regulated entities, educating them why they need companies like us who can provide transparency into the NFT space,” Timur says. 

Viroshan Naicker, who is currently building DeFi insurance startup Lime, agrees. “We’re not afraid of being regulated. We want to make things more transparent: FTX was the opposite of this.”

Meanwhile, the climate sector is struggling from a lack of regulation and policy to incentivise sufficient activity. Becky from Furbnow believes much more action is required in the UK to trigger the retrofitting revolution needed to meet emission targets. Current legislation lacks targets and delivery mechanisms; funding has little oversight, meaning capital is often going unspent; grant pots are constantly changing, creating confusion as to which homeowners, and for how much, are eligible.