Fundraising during a recession

By Anishka Prasad – Head of Strategy & Operations – Future VC

Fundraising for a start-up can be an arduous task for founders and their teams in normal circumstances, let alone in times of a recession and economic downturn. According to Pitchbook’s Q3 2022 European Venture Report, despite the turbulent market and economic activity, VC dealmaking has stayed robust among angel, seed, and early-stage rounds through Q3 2022 as roughly a third of completed deals were first-time financings.

Moreover, observations made recently are indicative of the fact that investors with dry powder will feel it is the optimum time to deploy capital to take advantage of affordable valuations and reduced competition among investors. Given this, start-ups that are several years away from an exit will continue to attract capital in the current market, as IPOs have not been in vogue in recent times.

Source: Pitchbook Q3 2022 European Venture Report

GBP Fluctuations and Fundraising

The current fluctuations and dips in the GBP may rise concerns for overall value decrease in the economy. However, early-stage founders in the UK and European ecosystem could find themselves in a favorable position with non-traditional investors such as angels and emerging fund managers who are yet to deploy their capital and have recently closed funding rounds with fresh capital at hand. Another interesting insight is that the current disparity in US dollar and GBP, have led experts to predict that this outlook would in turn increase US investor appetite in UK and European markets.

Identify Where You Are: Start-up Fundraising Cycle

Fundraising strategies are pointless if the founding team fails to identify where they sit in their fundraising journey and how far they need to go.

If you are an early-stage (pre-seed to series A) team looking to fundraise, here are some considerations for your fundraising journey.

1. Build a Strong Product

A strong product, albeit a prototype/ MVP is still a founding team’s core strength when fundraising. It need not be algorithmic excellence, but founders who focus on unique solutions, have a higher rate of success when securing funding, especially in the preliminary stages of the cycle.

2. Create a competent team – Retain talent

Hiring for a team that has buy-in and equity in the long-term vision of the company, not only equalises commitment of the founding team, but also boosts investor confidence.

3. Lean Stack – Cash Conservation

Cashflow is a redundant concept in most early-stage start-ups until product validation and revenue generation. In these circumstances, using cash sparingly pays off for runway extension while you are fundraising and closing any round. A common pitfall for pre-revenue start-ups is subscription-based overheads of any kind, whether its a marketing cost or subscriptions that are simply not contributing to converting more leads to cash paying customers. Avoid these where possible.

4. Calculate your funding needs

Prior to the pandemic, most companies fundraising were closing rounds higher than they initially set out to achieve. In the first instance, it may seem like a win. However, if an over-subscribed funding round, in which the founding team struggles to meet KPIs/milestones set in the term sheet with the investor proves to be the case, then the subsequent (potential) down round could cause to be fatal for both the initial valuation of the company and the performance exhaustion caused on the founding team. Prudently forecasting funding needs and building a consistent equity story that reflects in the company valuation, also bodes well with investors.

5. Examine your company’s financial health

Realistic runway assessment is a necessity when approaching investors for fundraising. Having a conservative approach on spend yet monitoring if actuals meet the forecasted is easier said than done, and often requires rigorous analysis. It is best practice to have more than one member of the founding team to be involved in weekly/monthly analysis of key financials of the business, such as comparatives on your current burn rate and benchmarking your company with known or assumed competitors in the industry.

6. Effective and Realistic Sales Forecasting

Getting a healthy, predictable, and constant MRR (Monthly Recurring Revenue) is the goal for early stage and newly launched start-ups. However, often, achieving a consistent MRR is a challenge. This does not mean that a start-up is not VC backable. In fact, if client traction or subscription commitments proven to investors, it would still demonstrate potential of deserving VC-backing. An example being, start-ups developing DeepTech products, for instance, barely having MRR until later rounds.

7. Assess whether you need VC funding – Exhaust other avenues

Not all businesses need VC funding. In fact, some businesses could benefit from scaling with VC funding at a later stage in their company’s growth cycle. What they might be looking for is a cash injection without giving up their valuable equity. In such cases, exhausting avenues such as grants and commercial partnerships with other businesses could prove to be more scalable options then seeking VC funding from the very beginning.

8. Don’t forget your R&D Tax Relief Credits (UK only)

If you are a start-up registered in the UK, the avenue of claiming back R&D tax credits to facilitate further funding could be an option. Basically, tech focused companies can get up to 70% of their tech development costs refunded and funneled back into their runway. However, having that said, this percentage can vary from business to business depending on the employee contracts and deployment methods of the tech development undertaken. Please do your research and shop around for reasonably priced accountants to help file an R&D return if you’re not confident with filing it yourself. In addition to this, please ensure that your start-up is SEIS and EIS accredited for de-risking investor commitment and potentially gaining more favourable terms from investors.

Quick Links:

Open VC – A platform with details on specific VC funds globally

Innovate UK – Grants for UK start-ups

R&D Tax Credit Relief – More information on Filing Tax Credit Relief

SEIS & EIS – More information on the Seed Enterprise Investment Scheme

You may also like - Snapshot of SEIS Changes to come April 2023