Part 1: what you need to know about the current market

There are a lot of things founders can do today to prepare for their Series A even if they’re not ready to raise yet.

At the Founder Summit a few weeks ago, Elizabeth Yin (GP at Hustle Fund) had a lot to say about what it’s like to raise money right now.

Elizabeth has invested in over 700 companies in the last 8 years, so she has a lot of experience and perspective on what's going on in the market and how to navigate it.

And if you don’t know what’s happening right now, let me break it to you: fundraising is tough, especially for series A and beyond.

But even if you’re not at that stage yet, there are (A) things you should know about what’s happening and (B) things you can do today to prepare for the future.

Here’s what we’re gonna cover:

  • What the &@#* is going on in this market?
  • How to think through your cash needs

What the &@#* is going on in the market?

VCs are not investing as much in the later stages. If you’re raising for Series A and beyond, it’s very challenging right now.

Why the sudden change? Well, there are a lot of factors.

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1. VCs are having a harder time raising funds

Just like many startups, VCs have to raise money from investors (these are called “Limited Partners” or “LPs”).

Currently interest rates are high, and many LPs are opting to put their money into a savings account and earn interest there rather than invest in a VC fund.

VCs have less capital to work with, so they become more conservative with their cash. This means they’ll be more selective about investing in new companies, or will focus more on bolstering their existing portfolio companies.

2. Companies are valued less

So if there are fewer investors (supply), there’s more competition amongst startups to raise money (demand). This means investors can usually get more attractive terms. But it’s not all sunshine and rainbows for them, either.

The term sheets from the few active investors have way lower valuations. With companies being marked down, VC’s overall portfolios are worth less.

But there is cash – this is not 2008

This piece isn’t intended to be all  doom and gloom. The good news:

  • Seed stage investors are less affected
  • Deals are happening but all stages are just moving slower

What does this all mean for you? Companies must be more prepared.

Know your cash needs

The benefit of a less frothy market is that it forces you to think about how much cash you actually need. Elizabeth suggests thinking about your cash needs in two ways:

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1. Stop the bleeding

Founders often say, “I need to raise $2 million.” Do you really? Probably not.

Instead, ask yourself: What is the minimum requirement to keep the company running?

Also how can you reduce your burn rate? How can you cut expenses? Are there creative ways to generate revenue in the interim?

2. Long term planning

If you can stop the bleeding, then how much cash would help you with long-term planning?

Think through your long-term vision, goals, metrics, product development, hiring etc.

How much capital would you need to hit those milestones? Is the answer still $2 million? Maybe. Or maybe it’s a smaller number.

You should aim to raise enough cash to cover both your short term and long term needs. However, if that's not possible, definitely prioritize your stop the bleeding strategy first.

Final thoughts

So here’s the deal. Fundraising for Series A and beyond is tough right now. VCs are having a hard time raising money and companies are seeing lower valuations. But there are still things you can do to prepare yourself.

Figure out how much cash you need to keep your company running. Prioritize the stop the bleeding strategy first. And really think through how much capital you need to hit your long-term goals.

In Part 2 next week, I’ll be back to cover:

  • How to approach your fundraising
  • What are “series A” benchmarks?