The market is correcting.
While opinions vary widely about what stage of the correction we’re in, there’s a unanimous consensus that we’re in the midst of a broader market correction. What started in early 2022 with global geopolitical tensions, supply chain constraints and growing inflation has now escalated to the fall of large banks like SVB and Signature Bank.
Market corrections are a good thing, particularly after experiencing a decade-plus bull market. This broader market run was further perpetuated by mass inflows of government spending following the 2020 pandemic. More specific to the venture capital (VC) industry, this bull run led to what became a record breaking 2021 with over $671 billion invested globally, $238.9 billion of which was invested in Fintech globally.
Then things started to correct in 2022 as geopolitical tensions and inflation started to have a real impact on public markets. This correction also had a particularly strong impact on the Fintech market which had seen a premium on their revenue multiples (see chart below). The result was a 46% reduction in Fintech investment between 2021 and 2022 and a 40% reduction in M&A activity as well.
Market corrections force both founders and investors to act more rationally.
Given these macro pressures, founders, investors and allocators are having to make more difficult decisions on where to deploy their capital reserves at both the VC and Limited Partner (LP) levels.
LPs who invest in VC funds are slowing their pace of deployment to emerging and established VC funds. This, in turn, is reducing the amount of capital VCs can deploy to new and existing founders. Founders therefore have less availability of capital and need to focus on showing tangible, revenue driving progress at the earliest stages.
Founders need to have 3-5x more conversations to raise capital than in years past.
It’s more important than ever for founders to make sure that they’re doing the right things while fundraising to make the best use of their most precious resource, their time. There’s nothing worse than getting to the 4th or 5th meeting only to find out that an investment likely isn’t the right fit. Especially if it’s something you could have learned on the 1st or 2nd call.
So what can you do as a founder to make sure you’re maximizing your impact in each conversation? Here are some strategies we’ve seen work well:
Always Be Fundraising - The best time to raise your next round is right after you’ve closed the last. Make it a point of having 2-3 VC meetings a week, especially if you’re not actively in the market. Investors want to be a part of the journey, not just a check when you’re ready for capital.
Know It’s A Numbers Game - Today, more so than before, you’ll need to have more conversations to find the right fit. Know that you’ll need to spend a considerable amount of time as a founder meeting with investors. Strategize your plan, find a good CRM, and look for “investor-founder-fit”.
Disqualify Quickly - It’s in our nature to try and win people over, especially if it’s someone who has told us “no” or “not now”. However, the worst thing that can happen is to spend too much time with a potential investor that you could have disqualified up front.
It may seem counterintuitive, but successful fundraisers know how to disqualify opportunities quickly.
That’s right, you didn’t misread that, the key is to “disqualify”. You want to spend time in that first meeting (~5-10 mins) vetting if this is a good potential investor at this stage. It's ok if some questions spill to the second call, but never let them spill into a third.
While you might think that asking questions may be a repellent for some investors, the reality is that we find it a positive signal. It shows that you, the founder, are aware of the relationship, care about your time, and want to have the right investors at your table. You’ll be able to spend more time on the right relationships as opposed to chasing empty leads.
Start a call by asking “before I tell you about us, I’d love to learn a little more about you”.
Here are the 5 questions that every founder should ask potential investors while fundraising:
1. Does the [SUB-VERTICAL OF YOUR STARTUP] fit within your current investment thesis?
You’ll quickly get a sense if an investor is currently pursuing companies in your vertical (i.e. B2C Fintech) or sub-vertical (i.e. Fractional Ownership).
2. What stage do you typically invest in?
Are they willing to invest today, or are they getting to know you to build conviction for a future round. Both are important, but one will slow you down today.
3. What is your typical check size?
Are they willing to lead a round, or do they have a smaller ownership target with an investment.
4. What is your investment process?
How long does it take from first call to a final decision and how does the team come to alignment on a potential investment.
5. How would you like to use our remaining time today?
You should ALWAYS share materials before a call, but don’t feel like you need to review them on the call if your potential investor wants to dive right in. Keep answers short and direct to allow the ability to cover as much ground as possible.
6. End the call with what is one key concern that you might have about what I’ve just shared?
This is my favorite question to get and to ask. It opens up the conversation to allow for candid feedback, and gives you a clear understanding of what you’ll need to prove to secure an investment.
Of course, taking this approach means that you’ll hear a lot more “no” and “not now” answers earlier on.
Disqualifying a lead is a good thing!
Remember to always leave the relationship on a high note with appreciation for time, and add them to any regular quarterly updates you’re sending out. It’s a light touch way to keep in touch and show your progress over time.
Investors want to be a part of the journey, not just a phone call or email when you’re raising.
Tip: Learn from other founders in your network.
The best advice you can get, however, is from other founders who have used these strategies to their advantage.
He shares the following tips:
Conduct thorough due diligence on potential investors. It's important to do your homework and research potential investors to determine if they have a track record of being loyal and supportive during tough times.
Interview fellow entrepreneurs. Through these interviews, identify potential VCs with a successful and contrarian record, seniority, experience, and a sterling reputation among other investors.
Build trust through referrals. The person who introduces you to a VC is crucial, as it can significantly influence the investor's decision to invest in your company. I recommend having an accomplished entrepreneur introduce you. Alternatively, seek out introductions from an investor with a track record of smart bets.
At Fiat Ventures we understand the role we play as investors, and that we don’t get to do what we do without the incredible founders we work with. If you’d like to learn more, please email email@example.com!