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Raising Startup Funding Used to Be Easy—Not Anymore
Sunday, December 22, 2024

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HomeBusinessRaising Startup Funding Used to Be Easy—Not Anymore

Raising Startup Funding Used to Be Easy—Not Anymore

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In 2021, when Roshan Patel was raising his startup Walnut’s first round of funding, his email inbox overflowed with interest from investors. Venture capitalists loved his idea of applying the fast-rising concept of buy-now, pay-later, a $100 billion industry , to health care bills. Patel secured $3.

6 million that spring and kept in touch with a few investors who might chip in more as the company grew. But when Patel sought a second round of funding in February—after public markets took a nosedive—investors were less warm. VCs now drilled him with questions about unit economics, sales efficiency, and a path to profitability.

“These are questions I was expecting to come later,” when the company was more mature, says Patel. When he walked investors through the startup’s mission and goals, “it was like, ‘OK, but what about the financial stuff?’” Patel stopped pitching Walnut as “Affirm for health care,” since Affirm’s stock had by then dropped 90 percent . In May, he closed a $10 million round, with another $100 million in debt financing.

By now, public and cryptocurrency markets are decidedly down, and the VC funding-fest of 2021 is over. Startup founders, meanwhile, are left dealing with the hangover. Global venture funding sank 26 percent in the second quarter of 2022, according to a report from Crunchbase .

Early-stage funding fell by 18 percent, suggesting that the trouble in public markets has now trickled down to smaller startups, which tend to be more sheltered from economic calamities. The sudden change has given some founders whiplash and has left others regretting they did not not raise money sooner. “Timing is everything,” says Emily Smith, the founder of ed-tech startup TeleTeachers , who started raising her Series A in April.

“Had I decided to fundraise a few months earlier, I think I could’ve closed it up and moved on. But it’s no longer the fall of 2021. ” Smith is still meeting with investors.

Smith says her startup has enough money in the bank to outlast a funding slump, but worries about the company’s valuation. Valuations in early-stage rounds dropped 16 percent in the second quarter of 2022, according to a report from Pitchbook —the first decline since the start of the pandemic. If a startup is valued too low, founders can be tempted to give up too much equity to increase their total funding, and face problems fundraising in the future.

At the same time, inflated valuations can also create problems. Last year, 340 companies reached unicorn status, with valuations over $1 billion. Some have since been dehorned by the turn in the market, and many are scrambling to cut spending or lay off employees .

Some have had to settle for “down rounds,” accepting new investment at a lower valuation than before. Klarna, the buy-now, pay-later pioneer, raised $800 million from investors in June but had to lower its valuation from $46 billion to $6. 7 billion—shrinking its worth by about 85 percent.

Raven Hernandez, the founder of electric vehicle ride-hail company Earth Rides , says that while valuations have lowered in 2022 and investors seemed less enthusiastic, a cooler fundraising climate had some advantages to founders. “There’s this balance of wanting to get a high valuation, but then what happens to the next round?” she says. “I’m thankful that we’re raising in a time when that valuation isn’t going to be so shocking.

” Despite the sullen mood among venture capitalists, early-stage startups have some reason for optimism. “This is, indeed, the worst time to raise money in a decade,” says Chester Ng, a partner at the venture studio Atomic. “It’s also the best time in a decade to start a company.

” Ng points to the many startups that have “risen from the ashes” of previous downturns: Airbnb, Instagram, and Uber were each founded during the Great Recession. Amazon and Google, both founded in the mid-’90s, benefited from the dotcom crash, after which talent became cheaper and competition thinned out. As the VC firm Sequoia explained in a memo to its founders earlier this year, startups can survive a downturn as long as they can adapt.

That’s usually easier for younger companies, which unlike more mature startups don’t have to wrestle with cost-cutting or demands for hyper growth. “When an asteroid hit the earth 65 million years ago, it was a really good time to be a small mammalian animal and a really bad time to be a big, lumbering dinosaur,” says Eric Velasquez Frenkiel, the CEO and founder of Pomelo, an early-stage financial startup. Velasquez Frenkiel raised a $20 million seed round this month.

For him, the fundraising process didn’t seem so different from 2012, when he founded his first startup , database company SingleStore, which is now a unicorn. “The biggest impact has been valuation adjustment,” he says, “but the reality is startups are still getting funded. ” Patel, the founder of Walnut, agrees that companies can still find capital, even if it takes more effort than in recent history.

He’s now focused on the teachable moments from last year’s funding bonanza. “We likely would have raised at a higher valuation if we did it in the fall of 2021,” he says, “but I view it as a blessing in disguise. Things got so inflated in 2021.

”.


From: wired
URL: https://www.wired.com/story/raising-startup-funding-used-to-be-easy-not-anymore/

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