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Tips for pitching investors in a downturn

Posted by Neha De

August 25, 2022

The U.S. economy is set to tip into a recession in 2023, according to almost 70% of leading academic economists, reports the Financial Times. Based on the Financial Times’ latest survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, “Mounting headwinds for the world’s largest economy after one of the most rapid rebounds in history, as the Federal Reserve ramps up efforts to contain the highest inflation in about 40 years.”

It is evident that a 2022 economic crash will be not kind to startups looking to raise capital, and those who wish to survive the downturn must take immediate action. This puts founders in a dilemma and begs the question — what’s next?

With VC investment receding, uncertain market fluctuations and inflation rising, now is the time for funding-hungry startups to put their best foot forward. During a downturn, investors expect founders to focus on building a great company, mitigating risks and being mindful of the value they are creating.

That said, the market downturn does not necessarily mean that all investors are closing their doors. While some may choose to take a more cautious approach for the time being, when meeting with investors who are still active, founders don't need to change anything about how they pitch investors. However, take a look at these eight mindset considerations that founders should focus on right now:

1. Making a change in the investing timeline

– Startup owners looking to raise funds need to review a new timeline for their investment process. While in 2021, reserving three to six months for fundraising could be considered adequate, in the current climate founders need to plan for a six to nine month process for every round following early pre-seed.

2. Reevaluating valuations

– Founders should keep an open mind about new valuation considerations. Valuations that worked last year will not be supported today, and startup owners need to manage their expectations accordingly.

Additionally, it is likely that a founder will want to raise less capital due to concerns about dilution, which could also lead to more prudent post-funding strategies.

3. Conserving funds and runway

– It is highly recommended that businesses secure at least two years of runway with any funds they raise today. In order to ensure that their company is not constantly fundraising, which could limit its ability to execute, additional financial breathing room is crucial.

4. Exceeding performance expectations

– Companies need to stand out from the crowd. This is especially true in a downturn market. When building a conservative budget, the biggest mistake founders make is cutting themselves off at the knees and threatening their power to execute. They still need to exceed their goals to set the seal on the best chances of further investment.

5. Focus on cold-blooded prioritization

– Now is the time to define the proof points that need execution in order to clear the way for the next round of funding.

In order to succeed, founders must have a plan and ensure their budget allows them to achieve this plan efficiently with minimal waste or wasted resources. In these difficult times, they need to consider a big-picture analysis of their activities to run lean. Prioritize specific initiatives that contribute to the achievement of defined goals, and ruthlessly de-prioritize those that do not.

While negotiating rent and other such services can offer some benefits in terms of cash flow, the payoff to cash flow will be insignificant. The biggest step founders can take to extend runway is prioritizing the core strategies that drive the budget, and cutting those that don't directly impact the next funding round's key objectives.

6. Focusing on the growth that counts

– A business model that has targeted revenue and can scale over time will be a priority for investors. The key is to prove the business model, and this cannot be achieved with alternative service contracts that might add short-term cash flow benefits but would likely disrupt the core business strategy. Founders need to prioritize the core model of the business and prove that building a scalable revenue-generating business from said model directly is a possibility.

7. Keeping their team motivated

– Tough times can put a lot of pressure on a founder, but it is essential to not let these pressures trickle down to the staff members. Even though laying off some employees may be unavoidable, most startups continue to grow before their next funding round. The key is to retain the top talent with engagement and excitement in these times.

8. Focusing on the next funding round

– While it is important to have a long-term vision for the business, the most important goal at this point should be the next funding round. This means at times sacrificing longer-term investments for shorter-term goals until the firm is adequately funded to support the greater vision.

Conclusion



Today's founders are faced with the challenge of maintaining conservative budgets while delivering aggressive results. The key is to keep their focus, prioritize ruthlessly and make sure they have a solid A-team backing them up.

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