How to Raise Venture Capital Funds in Today's Cooling Market

By Rom Lakritz

For the stock market, the new year opened with a nosedive worthy of a base jump, with the S&P 500, NASDAQ, and Dow all in the red. The dramatic decline ended up with a nascent, and somewhat hesitant, rebound, but shivers are still running down venture capitalists’ spines. They do indeed find themselves in a tight spot, which ultimately begs the question—will startups go through 2022 empty-handed? Is that a headwind wailing outside?

Well, not necessarily. It is still far too early to jump to far-reaching conclusions about the state of the union in the VC world, where things indeed got heated in 2021. Startups raked in $643 billion globally, which is almost twice as much as in 2021. Every week brought the world another 10 unicorns, on average. The past year also saw a record number of IPOs, and that’s where this story gets a bit less rosy.

Nearly 400 companies offered their stocks to the public, raising approximately $142 billion. But as VC darlings entered the open market, things often didn’t exactly go as planned. Even a quick look at the first 10 companies on Crunchbase list of 2021’s IPOs is enough to see that the public market has not been kind to many of the fledgling tech companies. While companies tended to be successful at the onset, their success was often short-lived, and the rest of the journey has been, in many cases, either an up-and-down roller coaster or a decisive slump.

Granted, nobody should expect VCs to be expert fortune-tellers, predicting public market successes with pinpoint precision. Their trade is risky, and their expertise is in bringing companies to the market and helping them scale up fast. And yet these IPOs do leave VCs with a few open questions, as others can—and will—factor them in as part of their own calculi. Will VCs be able to raise funds as effectively? Is it time for more conservative investments? Should startup founders hold their horses with VC pitching for now?

Raising venture capital in today's market requires an "old new" playbook

We are not in a “to raise or not to raise” moment—a good founder is always fund-raising, so there is no need to get all Shakespearean here. But it would make sense for prospective entrepreneurs to adjust their strategies to the current state of the market.

Differentiate your company from competitors

The first thing that is now more crucial than ever is differentiating your company in your messaging. Let’s say, for example, you are about to conquer the market with a brand-new social media platform where people can connect with their friends, share their pictures, build communities, and more. A lot like Facebook, in other words, and when approaching prospective investors, you will likely bring Facebook up as an example of how much traction your project could generate.

Well, here’s the bad news: At the time of this article’s writing, Meta’s stock is squarely in the red year-on-year, down more than 27% against last April, and its platform is beginning to slowly lose users. So one of the things you must get through to prospective investors is how you are in fact not like Facebook. Explain what your platform can offer to youth, the target demographic Facebook seems to struggle with, and all the market research that your claim is based on. Explain why investors won’t have to worry about the prospect of a Senate hearing featuring a whistleblower from your company. Anticipate these kinds of questions from venture capitalists. Show them how you’re different.

The right timing is key

Another key point that founders must get right is timing. Investors are always on the hunt for a business that’s just about to shoot up. In a year of uncertainty and economic jitters, it is twice as important for them to get the most bang for their buck as soon as possible. And that is the impression that your startup must broadcast in order to secure outside backing.

Granted, some of this comes down to optics management, and yet, this is even more about timing. In the current environment, it makes more sense to hold off courting VCs until the moment when you are beginning to gain traction. Is your team about to close its first sale? Good! Are there at least three companies already using your platform, including at least one willing to provide a testimonial? Even better! Is the idea still early in the works as you and your partner work to gauge prospective users’ needs? This is less ideal.

More articles from AllBusiness.com:

• 4 Big Ideas for Attracting Venture Capital to a Small Company
• The 3 Things Venture Capitalists Really Care About
• The Pros and Cons of Venture Capital Funding
• Where Can I Find Information on IPOs?
• What are the ways a venture capital firm will exit an investment?

Do your homework

When approaching investors, founders must also do their homework. Just recently, a colleague of mine saw a prospective investor jump ship at the very last moment, with the term sheet on the table. Had my friend spoken with a few of his peers to find out what the investor was like as a partner, he would have learned that this was not the first time this happened.

At the core of their disagreement was a lack of clarity on what happened next: while my colleague was hoping to pull in funds from a few more angel investors, the prospective partner had other ideas. And that is another crucial lesson for founders to learn—they must have a full understanding of what happens once the term sheet is signed. Investors are not just walking wallets, they are partners. Whom you shake hands with can make or break your project.

Develop products that have value

Finally, the one thing that never changes is the focus on delivering value to the client. Products that get the job done usually make it long-term, and they are also the ones that are less exposed to market movements. Companies that build such products still have an easier time in 2022 than they did in 2020, as the pandemic has turned more companies into early tech adopters, helping startups with the problem known as “crossing the chasm.”

Judging by the state of the world today, the factors that pushed VC investment into overdrive in 2021 are still very much present. From the concerns over new virus variants to employees’ apparent reluctance to return to the office, the paradigm shift induced by the pandemic has yet to release its grip on the world. In other words, businesses still have the incentive to innovate, which makes investors an amicable audience for new products and services that savvy startups may come out with.

Venture capital investment funding: looking ahead

While the market correction may rein in VCs just a bit, the fundamental tailwinds that filled their sails in the past year still are still pushing the space at a rate of knots. The demand for innovation is there, and companies that can offer genuine value will quickly find themselves awash with VC funds.

RELATED: A Guide to Investor Pitch Decks for Startup Fundraising