🏦 I Asked 5 Top VCs About the Current Fundraising Climate
🏦 I Asked 5 Top VCs About the Current Fundraising Climate
Featuring investors from Greylock, Polygon, Village Global, and more
Hey y'all 👋
This newsletter is built to help founders grow their startups.
Since fundraising is challenging at the moment, I'm trying something new — curated fundraising advice from great investors in my network. I've also added my thoughts.
We're fortunate to have some incredible investors sharing their current takes on how to navigate the market with us:
Christine Kim, Greylock
Lucas Bagno, Village Global
Julian Weisser, On Deck
Sachi Kamiya, Polygon
Brian Truong, Graph Ventures
Read time: 5 minutes
🏦 The Investor Update
What's the current state of the fundraising markets?
A higher bar for being able to raise doesn't deter great founders, and that lower valuations actually give founders more flexibility and less risk with their next round.
Bar to successfully raise is higher than before. But the average quality of companies raising seems highest in the last few years. I personally invest in 8-10 companies / quarter and have already done 8—might go over 10 before EOY because there are so many excellent founders out raising currently.
Valuations are now lower which is better for investors and founders who no longer have a high hurdle to clear for next round.
- Julian Weisser, On Deck
There's an interesting duality for investors right now — an uncertain future paired with a lot of already-raised capital sitting in their funds.
We're in a challenging environment for founders to navigate where, on the one hand, investors are being very cautious with new investments but on the other there's also a lot of dry powder to deploy.
Early stage investing, where I focus, continues to be active and we continue to see talented teams starting companies.
Some sectors (e.g. crypto) are going through tough times, but I think it's a test of investors' true conviction. If they were excited about the technology last year, they should be even more optimistic going forward as we have less hype and more focus.
- Christine Kim, Greylock
Market downturns can lead to the best companies — constraints breed creativity, which leads to novel breakthroughs.
Anecdotally, investment pace seems to have slowed down by 50% in the last few months. Investors, from angels to crossover funds, are licking their wounds from the public market compression, and it seems investors are waiting to see how the market shapes up — both from the ability of their current portfolio companies to raise money (and where valuations land) as well as the availability and liquidity of LP money.
From 2020 until early 2022, VCs were investing entire funds in 1-2 years because of the excess LP demand in the asset class, but with the current uncertainty, there are now discussions around slowing deployment cycles to the customary 3-4 years as was the case prior to the pandemic.
All said, there’s still an abundance of investable capital from all the fresh funds raised last year. Deals are getting done, but I think more money will aggregate to fewer startups: those that seem to VCs to have staying power and momentum. Some investors (Graph included) believe market downturns are often when the best companies are formed — as it brings about creative and shrewd business models, elicits widespread behavioral and market change, and washes out artificially competitive forces — and so we continue to actively pursue new investments.
- Brian Truong, Graph Ventures
The impact of FTX is having ripple effects across the market for web3 projects, especially at later stages.
After the FTX collapse, valuations significantly came down. Investors are taking their time evaluating projects. The time between taking the first call and committing capital has increased. Despite this, investors are open to evaluating if the project is solid with a strong founder. Pre seed/Seed/Series A projects in particular have less trouble raising capital vs series B/growth stage rounds.
- Sachi Kamiya, Polygon
An important point: there's currently a disconnect between what many founders are willing to accept compared to the realities of the market. Simply, times have changed.
It certainly feels that the stasis of the growth stage market has gotten to the early stages (pre-seed → A). Ultimately, the biggest thing we're seeing today is a big bid-ask spread on early rounds caused (in my view) by unrealistic founder expectations.
While a small subset of companies is able to raise a significant amount out of the gate due to some idiosyncratic reasons (ie, killer team, instant traction, etc.), the average company is no longer able to pull these things off, like in the good old days of 2021.
While there are a lot of pre-seed investors in the market wanting to do traditional pre-seed rounds (rounds of <$1M, valuations of <$10M), it is taking a while for things to correct and companies to accept this as a new normal.
- Lucas Bagno, Village Global
What advice do you have for founders raising right now?
Growth is the key — my advice is to be as creative as possible to explore new ways to grow
Focus on getting momentum capital from angels and small funds. Have realistic expectations about valuations. Showing continual growth during the fundraising process (in customers, waitlist, etc) enables prospective investors to see dots.
- Julian Weisser, On Deck
Bear markets can be big opportunities for teams that can afford to be comfortable being aggressive.
I think there's plenty of advice out there around building defensively — cutting costs, optimizing burn, and trying to operate as lean as possible — and while that will be the default mode for most companies, I think it's worthwhile to consider the other side too.
If you have product-market fit and an efficient growth engine, then you should feel more comfortable with an aggressive plan. It's easier to hire, cheaper to advertise, and the competition is weaker during bear markets.
It's still an incredible time to start a business and we're very much open for business here at Greylock, so would love to meet early founders at any stage of their journey.
- Christine Kim, Greylock
Running a well-defined fundraising process is somehow underrated. During a down market it becomes even more important.
Don't have random conversations with investors. Run a formal process, get the right introductions, and talk to many people at the same time. I'd also probably wait until the new year to start this process.
Finally, if I were a founder, I'd definitely want to have *at least* 6 months of runway before starting my process. Ideally 9, or maybe 12. Companies that try to go out and raise in this market with less than 6 months of runway will start at a big disadvantage.
- Lucas Bagno, Village Global
What people say really is true — some investors don't write checks in December. At a minimum, waiting til January will increase your chances.
For projects raising at the moment, I suggest waiting until mid-January/end of January to start raising. Most investors will be back from the holidays by then. If possible, it is best to connect to potential investors through a strong introduction rather than cold outreach.
- Sachi Kamiya, Polygon
I shared a calculator to help you structure your fundraise with tranches a few weeks ago. The decision of whether to offer any other preferential terms to early investors, such as increased liquidation preferences, is another topic I'll talk more about in the future.
This is mostly geared towards pre-seed and seed-stage startups, where I focus.
Don’t be afraid to raise in tranches. Identify investors willing to move fast, and incentivize them to close early with slightly preferential terms. Once you have momentum, you can increase the valuation cap for newer investors; on a blended basis, you may be able to dilute your ownership by a similar rate as what you aimed for at the outset.
And at a base case, at least you have a minimal viable runway to keep your business going, plus early advocates who can introduce you to a wider network of investors.
- Brian Truong, Graph Ventures
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