After record-breaking venture capital investments in 2021, the VC market has cooled off due to the public market downturn, rampant inflation, interest rate hikes, and geopolitical shocks.

Large investment firms have publicly announced their intentions to slow the pace and volume of capital deployment as they evaluate market conditions. Softbank plans to cut startup investments in half after reporting record losses while Tiger Global plans to limit the number of new deals until the end of 2022.

Unicorns that not too long ago received sky-high valuations are seeing those valuations plunge. Klarna, a Swedish ‘buy now pay later fintech startup, raised $650 million at a $6.5 billion valuation in July 2022, an 85% drop from its $45.6 billion valuation a year prior. A host of other startups are similarly contemplating flat or down rounds to stay afloat.

Unsurprisingly, startups are worried about how this will impact their next raise. The era of throwing money at startups in the fear of missing out is over for now. Investors are being more selective and slowing down the pace of deals, which means the threshold for receiving capital has risen.

But, venture dealmaking, like innovation, never stops. VC firms currently have $230 billion of capital available to invest in startups. This number will only increase as US VC firms have closed on $137.5 billion in new funding in just 8 months this year, nearly surpassing 2021’s full-year total of $142.1 billion.

Instead of a complete halt, VC firms are moving at a slower pace and adjusting their expectations amidst uncertain and volatile market conditions. Startups seeking to raise capital must now adapt to these changing expectations in order to successfully fundraise.

How Startups can Successfully Fundraise

So, what exactly can startups do to increase their chances of a successful fundraise?

First, startups must understand how investor expectations have significantly changed.

The “growth at all cost” approach is no longer in vogue. As Kanyi Maqubela from Kindred Ventures notes, "We're reverting back to a market where founders need to focus on profitability and sustainability…founders should treat cash like oxygen you have to preserve while orbiting in space." Startups can no longer rely on capital injections to fuel unsustainable growth. Instead, founders need to outline a clear path to profitability based on sustainable growth.

Investors want to know startups will use the capital efficiently and strategically. The days of “blockbuster” startups burning over $1 billion in a quarter are over. Startups that can validate the market and achieve product-market fit on smaller budgets garner significant leverage and credibility when pitching investors. By doing so, startups prove they have a much-needed product AND a great team that is able to execute with limited resources. Being lean and scrappy is the perfect signal to send investors in a capital-scarce environment.

Startups should be mindful of how much runway they have left. A good rule of thumb is 18-24 months between rounds. As mentioned before, investors are slowing the pace and size of deals, which means founders must factor in the additional time spent fundraising when projecting cash requirements. Investors, in return, expect startups to stretch funds over a longer period of time. At this time last year, 12 months of runaway may have felt like enough, but this is no longer the case.

Founders need to double down on building a quality product or service that people want. This, of course, should always be the central focus of any startup. But the market downturn means consumers and businesses will re-evaluate purchasing decisions. Low-value-add products will be the first to go in cost-cutting efforts. VCs, now more than ever, want to invest in builders that can create high-value products on a tighter budget — and, just as importantly, they want founders that can clearly articulate the product’s key value propositions. It isn’t enough to build a great product if nobody knows or understands what is so great about it.

In summary, startups should keep the following in mind when preparing to fundraise:

1. Demonstrate how the company will become profitable in a sustainable manner — growth alone is no longer enough

2. Provide a well-thought-out plan with a manageable burn and adequate runway — startup teams need to show they can be strategic and scrappy

3. Double down on building a great product and clearly convey its value — investors love builders that can tell a compelling story about their product

Adapt Your Pitch

The VC market is slowing down but investors never stop looking for great startups to invest in (that is their job after all).

Founders should use the market slowdown to think carefully about how they will present their business to investors. Adapting your pitch to investor expectations will significantly improve your chances of a successful fundraise.

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