5 thoughts on how to go about fundraising and valuation these days

These are tough times. The collapse of SVB reflects the hype that took over the venture world in the past three years. I won’t discuss what brought us here because it has been well discussed, and it is mostly a consequence of the tragic pandemic that hit us all in 2020. It is also very difficult to forecast the future and put a timeline on when this winter will pass, or if there will be an even stronger winter around the corner, perhaps a nuclear winter? I am an optimist by nature and want to believe that global inflation will be under control within the next 6-9 months, lowering interest rates and increasing risk appetites for public equities first, which should then flow into the venture world in the next 12-18 months. But, of course, I can be completely wrong.

For startup founders who will be running out of capital in the next 6-12 months, the relevant question is “when should I go to market, and how should I think about valuations?” Here are my five thoughts:

1. Extend your runway as much as possible. Work hard to transform 9 months of runway at current cash burn into 15 months. Do it by focusing obsessively on proving product-market fit (PMF). Growth alone won’t do it; it has to be sticky, and the unit economics need to make sense now (or with an obvious scalability lever that will be reached soon and that is easy to be believed by investors). If you have conviction that you’re on the path to product-market fit, ignore distractions such as new product development, events, travel, etc. Trim areas and functions that are not relevant for proving product-market fit, even if they may be relevant in the future. Now it’s time to focus heavily on doing one single thing well, so having less pressure on the funding side by extending your runway will payback handsomely if done well.
2. Cultivate investors’ relationships. Investing in early-stage startups is an exercise in futurology. Simplistically speaking, investors need to believe in the problem you’re trying to solve (the easiest part as you’re solving a pain that exists today), in the solution you’re building for this problem (more difficult as likely your product is not mature enough yet), and that there will be a large enough market for it (the most difficult as this is long-run, and many factors can influence your growth and future market share). Getting to believe that these three pieces will come together takes time, and good founders invest in educating investors that seem interested in learning more. Investors also need to develop a sense of trust in the founding team, which does not happen overnight. Your credentials and background checks will help, but nothing substitutes a relationship built over several interactions. I always recommend that entrepreneurs use investors as mentors prior to fundraising: when you meet with investors, don’t only pitch but use your meeting to ask smart, specific questions that that particular investor will be able to provide perspective on.
3. The best time to go to market is now. The best way to get a sense of how difficult it will be to raise capital is to actually be open to accepting term sheets. Many founders are delusional in their ability to raise, especially if they first raised in the boom years of 2020-21, and believe that with them it will be different. In these cases, I encourage founders to softly communicate to select investors that they would be OK to raise a bit more. The market will quickly let you know if your pitch and business is investment-grade or not. Of course, be prepared and show your best – you don’t need to have a data room ready or a super updated pitch deck, but the narrative needs to be compelling and the numbers must be in place. Once the feedback has been received, please be open and egoless about interpreting the messages as many funds will not be 100% transparent because they have no incentive to do so. It’s only by being realistic about your ability to sustain your company in the long-run that you will be able to make the necessary adjustments on time.
4. Expect a flat or down round. Publicly listed tech companies that had their IPO in 2020 have lost ~60% of value. Why should your company that is probably further to finding product-market fit and has a lot more risk be valued more than what it was marked at the peak of the market? Be ready to accept more dilution and maximize your ability to create long-term value. I guarantee that for companies that have found PMF and are on the path to generating cashflows, the way your cap table was impacted during the current crisis won’t be a problem. I have seen stock options being refreshed multiple times, but it only happens when investors are bullish that the company is on the right path to value creation (which is not short term valuations, it’s about generating future cashflows consistently).
5. Overcommunicate with your teams. The importance of culture is shown and perceived in tough times. The challenges and the problem solving that the company is going through should be shared with at least your leadership team on a consistent basis. I actually believe it’s positive to share it with the whole organization, making everybody feel part of the same boat and bonding people as a real community. People don’t like to be surprised and you, as a leader, should avoid gossips and create an environment of transparent and objective communication. Now, more than ever, it’s time to put the company values in practice and to practice storytelling every week: where you’re coming from, where you’re right now, where you’re heading to, and how to get there.

Overall, I am optimistic about the future of the Latin American tech ecosystem. I joined it 10 years ago and it has dramatically matured, expanded and proven itself during this time. We’re going through a global economic cycle that will end at some point, so let’s be quick and effective in the short-term, making the hard decisions now to celebrate in the future.