2023 Startup Fundraising Outlook

The historic heights of VC funding in 2021 was met with a mixed year for startups in 2022. Sustained macroeconomic pressure resulted in significant pullback from investors in latter quarters. The 2021 mantra of growth at all costs has turned to a focus on cash preservation and path to profitability. For startups raising in 2023, be mindful of the following factors which may impact your raise. 

It's now more competitive to raise capital 

Crunchbase reported venture funding for the third quarter of 2022 totaled $81 billion, down by $90 billion, that's 53% year over year. In 2023, startups will face further headwinds as economic uncertainty continues. With less capital projected to be deployed it’s important to go back to basics and focus on product market fit and unit economics to improve the path to profitability. With competition comes a (welcomed by many) return to more due diligence and the need to create long term value for investors and stakeholders. 

Are you building real solutions to real problems?

With renewed adversity towards risk, founders will need to have a compelling product that solves a real pain point.  Keep in mind that simplicity will triumph complexity as consumers move from bells and whistles and investors will be more focused on profitability. In previous downturns, entrepreneurship flourished when startups such as Airbnb, Slack and Uber have been founded.

But wait, there is so much “dry powder”

While many speak of “dry powder” (the amount of committed, but unallocated capital a firm has on hand), many firms will be focused on providing follow-on or bridge round investments to their portfolio companies. Carta reports that from Q1 to Q2 2002, Series D and Series E+ companies saw bridge rounds increased +7 and +14 percentage points, respectively. Additionally, not all VC’s have made capital calls and may delay doing so to reduce pressure on LP’s due to weak performance of public markets. Don’t forget to look beyond traditional VC’s, for example, family offices, solo capitalists, and angel pools for capital raises. 

Changing Valuations

Recently, climbing valuations became the most desired headline for many startup founders. It signaled momentum to investors, customers, and employees. This was primarily driven by investors as many targeted the same deals. There has now been a giant shift. Pitchbook reported valuations were down an average 43% in the fourth quarter from a year ago. The new reality for founders raising may be a down round as valuations are reset. A down round once feared by many, may be the only solution for continuity. This short-term setback will be worth long-term gains. 

Runway 

In May, Y Combinator sent a communication to their companies that “regardless of your ability to fundraise, it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.” The challenge for startups is investors like to see good runway and in a constricted fundraising environment it may lead to a chicken and egg situation. To combat this, focus on building strong positive unit economics. Be fiscally conversative. 

Venture is Changing

Many agree that the venture capital industry is going to go through a period of change. Since 2019, the number of firms at every stage has proliferated while unprecedented capital flowed into the venture and startup ecosystems. Now during a period of higher interest rates and a period of reduced liquidity they face more competition not just for capital but for deals too. 

Many smaller funds will not survive given their need to secure big exits to survive. Jason Lemkin, CEO SaaStr Fund, highlights, “VC funds need about $2B in “exits” for each $50m they raise”. Ultimately, the best investors will ones that can provide follow-on capital or have avenues into bigger capital pools for later rounds. A bonus is their ability to help accelerate your growth beyond just writing a check. 

If you have questions, please reach out. Belayer is on a mission to connect startups with knowledge, network and capital.