⛰️ The road to funding in 2022 is a steep one. But, nobody says you have to walk it alone.
At Claimer, we believe in the value of a healthy network. So...to foster useful connections, help share practical knowledge, and bring together as many inspiring people as possible...we threw a party! 🥳
On September 29, we organised our Autumn Founder Party, and we're hoping to plan many more.
At our event, we brought together 80 founders and a panel of six industry veteran panellists (supplied, of course, with drinks, canapés, and plenty of ice).
All were there to answer a question that's been on *a lot* of our minds.
Can startups still fundraise in a recession?
And if so…how?
💬 What followed was an almost hour-long discussion, filled with insight and advice.
If you couldn't make it (or if you could, but need a refresher) we've broken it down below.
Without sugarcoating it, our experts laid out the challenges of the current market, along with what to expect in the future.
They had some ideas about timelines, and they also delved into the following topics:
- ➡️ What VCs look for when writing cheques;
- ➡️ Why a down market can be helpful;
- ➡️ How to identify a value-positive VC;
- ➡️ Where you might source alternate funding.
👀 Not to mention, our favourite: one, all-important, piece of advice for founders to leave with (which we left until the very end).
Our event was expertly hosted by Sifted's Deputy Editor Eleanor Warnock (whose work we warmly recommend you read or listen to).
Meanwhile, our panel was chaired by:
- Maria Palma, General Partner at Kindred Capital
- Emma Phillips, Investment Partner at LocalGlobe
- Jonathan Keeling, VP & Commercial at Crowdcube
- Anil Stocker, CEO & Co-founder at MarketFinance
- Adam McCann, CEO & Co-founder at Claimer
Let's dive in! 🤿
Scroll down to read what they had to say. To get the video of the talk, and to get more updates like these on a weekly basis, sign up for our newsletter below 👇
Funding in a Recession
If you've noticed a lot of doom and gloom on the news and on Twitter…well, you're not wrong.
All you have to do to see the opportunities, though, is look a little closer. "Great businesses are still getting funded," said Investment Partner at LocalGlobe Emma Phillips.
Sure enough, across the panel, we heard that there's room for optimism when it comes to funding.
The situation nowadays, Emma said, isn't all that far off from where we were about three years ago.
It's really not as drastic as what it may seem in the press. People are sitting on money. We do love what we do, genuinely, and we are genuinely looking to back amazing people that are doing interesting things. It's really not as doom and gloom as it seems.
Emma Phillips
Overall, Emma stated that "for good founders with good businesses, we're still writing checks, and it's still getting done."
This was echoed by Maria Palma. Maria, who is General Partner at Kindred Capital, specified that, as a high-conviction fund, Kindred "don't do a tonne of volume in a row." But, they're also still writing cheques, she said.
We're in Bear Country
It would be misleading, though, to act as though the situation hasn't gotten harder.
🐻 The subject of the event, after all, was fundraising in a recession.
Unfortunately, the hardest conversations may not have happened yet, agreed both Emma and Anil Stocker, CEO & Co-founder at MarketFinance.
After all, they said, valuations and rounds were so high last year that many companies may still have enough to float them through until next year. People may also be avoiding raising rounds until they really have to.
After that, though, "it might get worse before it gets better," said Emma.
But rather than focus on hand-wringing, let's look at some of the challenges founders may face. 🔍
First, everything is just taking longer, especially at later stages. Emma quantified the time increase as "really substantial."
"Amazing businesses that you think should get over the line very quickly, are taking at least six months to get done," she cited as one example.
Maria backed this up. "If you’re doing a growth stage round, they will double-click, and it will take a long time," she said.
She said this is a departure from last year when rounds were lasting as short as a week. "It’s almost like it righted it."
✈️ Runway, too, should be longer to account for longer wait times.
At least three years' worth of runway is the new suggestion, said Emma, compared to a usual 18-24 months, acknowledging that this comes with more dilution.
And while she clarified she didn't speak for all institutional investors, she said that she and her colleagues "don't have any pressure to deploy [their] funds at any type of speed."
Still, Emma also noted that she's equally not under any pressure, as of the time of the event, to slow down.
She summarised:
There is a lot of dry powder out there. And we all love our jobs. We're going to be hunting to make deals.
Emma Phillips
Average VC cheque sizes are also down YoY, said VP Commercial at Crowdcube Jonathan Keeling. He noted that on the retail investment side, they're seeing a lot of flat rounds.
"Obviously, fundraising is really, really challenging," he acknowledged. "We're very aware of that."
Emma also agreed that it is a little tougher out there for first-time founders, who might also be feeling a "bit of nervousness."
Startups and Scaleups can Still Get Funded
Maria, Emma, and Jonathan all had positive takeaways, though. ☀️
Jonathan explained how the investment volume was still there. And, so was the appetite from retail.
Maria said that if you have a good company on your hands, she thinks "you'll still get funded...it's not going to really go away in a real sense."
Emma agreed, reminding the audience that, in a sense, she and her colleagues are "paid to be optimistic."
After all, many VCs are in the business because they have that risk-taking personality type, she said.
Emma was clear on the main point: "We've still got a job to do."
Not only that—there is "massive opportunity," she reminded the audience.
For example, said Emma, over the last couple of years seed investors may have done pre-seed, series A may have done pre-seed and seed, and so on.
But now, things have realigned: Series A has gone back to Series A, etc. This leaves some openings.
Maria also pointed out what has become available. "Some of the best VC returns are in the down market. So I think it's an opportunity for sure."
A Down Market Can Be Good
And speaking of opportunities…raising in a down market may *actually* prove to be a defining moment for your company.
I know it sounds crazy…but it makes sense. Remember, unicorns are also born in bear markets. 🦄
Maria explains how the current conditions could realign people's mentalities to be more efficient.
I think that people have been raising in up markets for a long time. There was a lot of feeling last year of: “Why would I raise two on 10 when I could raise four on 20?” And the answer is usually the next round.
Maria Palma
Maria jokingly recognised the irony in a VC making the argument that a recession is good for founders, too.
(It's much easier, after all, to not be raising any valuation through it).
But, she pointed out, "it does sometimes force you to build your business differently."
A lot of founders I know who bootstrapped before they raised feel like they don't want to do it again because bootstrapping is really painful. But, they felt like it helped them find customer fit faster…because if they didn't have customer cash coming in, they weren't making any money. And so they had to really get the product that fit.
Maria Palma
🌩️ Basically: every cloud has a silver lining, even if it comes on the back of a storm.
Now is the time, if there ever was one, to spend wisely (within reason), trim unnecessary fat, focus on building a better business, and really zero in on market fit.
How to Cold Reference your VCs
VCs may have pulled back. But, that doesn't leave founders without decision-making power.
In fact, the two early-stage investors on the panel, Maria and Emma, both stressed the importance of cold-referencing VCs.
Good VCs should bring value, said Maria. They can be helpful, even emotionally, "to be a support in the crazy journey that it is to be a founder," she added.
On the flip side, she warned of value-destructive VCs. Your main job as a founder, she said, is to find someone who is value-neutral to value-positive.
To do this, she suggested cold referencing and going beyond a VC's term sheet. This is especially relevant, added Maria, when it comes to someone who's come from outside the immediate ecosystem.
📧 How? Reach out to founders, especially ones connected to situations that have gone badly, suggested Emma. "That's when you really find out what people on your cap table are like."
Find Alternate Funding
This is also a time to be at your most resourceful when it comes to funding.
💵 Indeed, not running out of cash should be one of your highest priorities...as obvious as it sounds.
Maria reminded us of how many companies have gone under for want of cash–even with good P&L. And this is a problem that gets exponentially worse as you grow, added Anil.
Here, a founder can really test their mettle. 💪
To come out the other side, said Anil Stocker, you'll need to plan it out.
"I would encourage everyone to have plans B, C, and D," advised Anil. "Because you can't just hope that equity will come."
To do this, Anil encourages thinking outside the box; creative thinking like approaching your biggest customer, or a supplier. Overall, he suggests exploring different plans.
And while VCs may be getting cold feet, Jonathan also pointed out that smaller retail investors may be more than happy to snap up these new opportunities.
Indeed, this may benefit founders, as the process is typically faster than going through institutional investors.
A smart investment in-house, said Anil, would be to hire or nominate someone to work on identifying further opportunities.
Whether it's a grant, whether it's unlocking cash from invoices, whether it's asset finance, whether it's embedding stuff into your product that releases cashflow early [...] having someone whose job it is in this period to focus on that, I would say is really time well spent.
Anil Stocker
Why Use R&D Tax Relief
This brings us to…you guessed it! R&D tax relief.
After all—given the proper help—it can be one of the best ways to pull that extra backing. 💰
Adam McCann, our CEO and Co-founder at Claimer, explained more about what R&D is actually for.
Founders are notoriously scrappy, so R&D can come in handy, sure. It's not unheard of for it to be used to bridge you until your next VC round.
But, Adam reminded the audience, it's actually there to "uplift you, to maintain that momentum."
I think there's this big misconception that people are treating R&D like some extra cash, just to survive. If you need R&D to survive another month you've got bigger problems. What R&D's really there for, instead, is innovation.
Adam McCann
Overall, R&D makes up a significant amount of money in some ecosystems. "Globally," Adam said, "it's massive."
In the UK, he explained, "as a rule of thumb," it's about a third of your loss-making, of what you're spending on genuine R&D.
Our Most Important Takeaways
By now, the panel discussion is drawing to a close, and with it, so is our recap article.
🥂 With our ice fully stocked and plenty of drinks and canapés to go around, the panellists did a quick fire round, sharing one last, important, piece of advice.
Here were their *mustn't forget* takeaways:
- Be bold and confident (Jonathan)
- Think critically (Adam)
- Be realistic (Anil)
- Get everyone on the same page (Emma)
- Don't do it alone (Maria)
Be Bold and Confident
Jonathan Keeling urged the audience to ignore the noise as much as possible and avoid getting too caught up.
"Be bold, be confident. Still believe in what you're doing," he said.
He cautioned to still listen to the guidance of the pros on valuation and all that good stuff, but that the opportunities are still there. "Go at it as aggressively as you would have last year."
Think Critically
"Turn your critical thinking up to eleven," encouraged Adam McCann.
There's quite a lot of negativity out there, he acknowledged. And while you may be hearing that you should be cutting costs, the answer comes when you "look at your own business."
For example, is there a route to anything? Can you afford to invest a little bit?
When everyone’s running one way, you have to really critically think: do I want to run the same way? Or do I have an opportunity to do something unique here?
Adam McCann
Be Realistic
Hear us out…being realistic, being bold, and thinking critically are not mutually exclusive.
If you look at the numbers, after all, there is a difference between now and then. For example, Anil Stocker told the audience that, around a decade ago, he had raised £300k on an £800k valuation. Following that, he instead gave the example of how it had become possible to instead raise £5m on a £25m valuation...even with little more than PowerPoint slides.
That time will probably never come back, or it won't come back for a very, very long time. I would say: be realistic, be real, and don't get caught up in the vanity of the VC valuation. At the end of the day, it's about delighting customers, making profit, being a good business–and staying focused on that.
Anil Stocker
Get Everyone on the Same Page
Not only should you cold reference your VCs and think more critically about why you're bringing them on board, said Emma Phillips. You should also look at everyone's vision, together.
If you're bringing multiple funders in a round (especially if there's joint ownership in some way) you should make sure they're aligned on plans for your business for the next 12 months, she suggested.
What if, for example, one investor on the cap table is product obsessed, while on the other side you have a push for sales and revenue?
This can be a "horrendous" experience for founders, said Emma, who may have built trust and a bond with each of these different sides individually.
It's best, as a solution, to really check that they're aligned. "It's never going to be completely harmless," she joked, stressing that making sure everyone is on the same page is "really important."
Don't Do It Alone
A strong support network can save you from falling too deep during a down market.
Maria Palma clarified that, by this, she doesn't mean a team–she means other founders.
This, she said, can help you know what's normal in the market, or help understand what is happening.
"If you don't already have a founder network…you're literally surrounded by founders! Don't leave tonight without two new names of people," she urged.
"And obviously, use Claimer!" she laughed.
Now that's advice we can get behind. Book a call with us today! For more tips AND for the full video of the event, (and an alert for our next party) sign up for our newsletter below 👇
