June 14, 2022

How early-stage founders can approach fundraising in today’s hazy market

[object Object] How early-stage founders can approach fundraising in today’s hazy market

What do rising interest rates and inflation highs mean for pre-seed and seed companies that are hoping to fundraise?

At our virtual event, Raising money in hazy markets, Immad Akhund (co-founder & CEO, Mercury) joined forces with Jenny Fielding (co-founder & managing partner, The Fund), Kanyi Maqubela (managing partner, Kindred Ventures), and Zach Coelius (managing partner, Coelius Capital) to discuss this question from the investor perspective.

Here are some key takeaways:

  • Capital is expensive — take as much as you can.
  • Be realistic about your valuation and trajectory.
  • Find core investors that will go to bat for you.

Watch the full recording here:

Over the last few years, we’ve seen cheap capital flood the market, encouraging startups to rapidly grow their market shares at whatever cost — especially during the pandemic.

The end of easy money, high market liquidity, and low interest rates have been reality checks for many companies, whose valuations have plummeted to pre-2020 standards.

Jenny expressed empathy for today’s startups: “What’s interesting about this panel [is that] we’ve all been founders . . . many of us were there,” she said, referencing her experience selling her first company after the 2008 financial crisis.

In today’s economic climate, the worst-case scenario for a seed company is running out of capital because it is increasingly difficult to come by. To make money last, Zach advised founders to anticipate a longer fundraising timeline (18–24 months) and to secure as much capital as possible without giving away more than 30% of their business in equity.

Kanyi Maqubela quote

Should companies raise on a certain valuation? It’s not that straightforward, according to our panelists. Founders should begin by understanding their market comps. To a large extent, explained Kanyi, a company’s valuation is at the whim of the overall market, which in turn, impacts how an investor will evaluate that company’s potential — and its risk. Rather than including a valuation in their decks, Jenny recommended that founders ask their prospective investors what they think a correct valuation range would be; it’s in an investor’s best interest to tell the truth.

Over the past six months, more founders have opened their funnels. They’re returning to investors they previously didn’t see eye-to-eye with on check size; this time, to ask for less money. Kanyi said that this is not necessarily a red flag to investors if founders can present a solid case for how they plan on using the new amount, as well as a realistic cap table.

On finding that core investor for a seed round, Jenny said: “[Having] someone that has conviction, that’s going to be supportive even if they’re not a board member, . . . someone that you're checking in with that's going to write another check . . . that's going to be there for you . . . [This] is going to be super important.” At the end of the day, small checks from “tourist investors” and party rounds on their own are not going to set companies up for success — it’s checks from advocates who will go to bat for a founder in a proper fundraising round that can make all the difference.

We’re always looking for more ways to support founders. If you’re interested in fundraising support as an early-stage company, keep an eye out for the next round of Mercury Raise Seed. To start connecting with investors directly, head to our Investor DB. To explore more financing options, take a look at our Venture Debt program.