Is your startup considering raising money from investors right now? Unless you are the CEO of LinkedIn or Twitter, you know that now is not the greatest time to be asking for cash. But what’s it really like out there for people still trying to take on investors? Is it even possible?
A down economy affects startups in several ways. On one hand, it could dry up your customer base. Startups in the financial, enterprise, real-estate, or advertising sectors are being hurt worst because customers are cutting back.
But in addition to the challenge of finding paying customers, the other issue is that investors are scaling back. If it was hard to raise money in the past, it’s harder than ever now.
Sorry, but it gets worse. Not only are investors scarce, but then there’s the issue of valuations…
“Valuations are definitely taking a tumble.” says StandoutJobs CEO, Ben Yoskovitz, “If you’re doing a second round or a bridge round you can expect the valuation to be the same as what you had before or lower. I think a lot of companies are looking at bridge rounds from existing VCs versus new rounds to keep afloat, and existing VCs are keeping more money in their pockets to help out their existing portfolio.”
The interesting feedback I received from entrepreneurs is that, even though things are tough, it is not any more difficult to get meetings with investors.
Toronto startup lawyer, Suzanne Dingwall Williams of Venture Law Associates, agrees:
“It’s still easy to get meetings with ‘investors’. But the trick remains sorting who is actually investing, and who is simply data mining. …. On the VC side, many VCs are either (a) out of money, (b) have money that’s only available to support existing companies or (c) are too busy looking at selling their stakes in the secondary market to be able to focus on you.”
What’s a funding-ready startup to do? Here’s some advice we’ve collected from Canadian startup entrepreneurs and advisors:
- Don’t worry about looking good. Money is scarce right now for everybody, so no one cares where you’re getting it from. If it used to look bad to do many small rounds in a row, to take money on the same valuation as you had before, or to scale back your team, well, do what you gotta do. If your startup is alive and stays alive for the next two years then you’ll be doing better than most.
- Raise an internal round. The easiest way to extend your runway is to make drastic and deep cutbacks. Cut now and cut deep. Then move on.
- Wait. If your company is growing when others aren’t but valuations are half of what you’re looking for, then it might make sense to keep bootstrapping, double your revenue, then ask for a better valuation. Or at least position yourself so it’s possible to do so.
- If you are looking for seed money, forget about it and bootstrap. Get to revenue. Ideas and hype are worth nothing now. Paying customers, healthy cash-flow, and clear paths to profitability are more important than ever.
- Make multiple plans. In the past, it would be bad form to go to a VC and say “we have plans for if we raise 100K, 1M, or 5M” because that would indicate that your plan doesn’t necessarily need a VC. Things have changed.
- Pre-screen VCs. You can waste a lot of time right now meeting with investors that are doing their best not to invest. Ask around, search StartupIndex, and feel free to email me, if you’d like my opinion on who is ‘really investing’.
- Use government funding. “The story for funding for 2009 is how to structure your business so it can attract government money. BDC just got another $300 million this week to deploy in the form of term loans and lines of credit,” says Suzanne. If you talk to experienced entrepreneurs, you’ll receive mixed reviews about BDC loans, but you’d be foolish not to look into them.
- Give up. The businesses that never made sense are going to fail early. But there will be a bunch of businesses that might have been good yet will never see the light of day. It’s okay to put your startup on pause and work for a consulting company; we won’t judge you (as long as you have a secret side project).
Is your company trying to raise money right now? Are you a startup investor? What has your experience been like? Let us know in the comments below!
It’s hard to know what to say about efforts like this. I guess that where I believe physical clusters are a sign of success, government officials and universities believe that they are a precursor to success. To that end, more money is being spent building the new Silicon Valley North, this time it is smack in the middle of the porn shop and peepshow strip in Toronto.
