VC funding is drying up—here’s how founders can fundraise, regardless

Aspiring entrepreneurs are facing a worrying trend: venture capital (VC) funding is drying up. 

The current macroeconomic environment is driving up the cost of capital, making venture capitalists more reserved on the investments they are willing to make. Until recently, the VC space was undergoing a boom cycle, where the cost of capital was low, more companies were getting funded, valuations got higher, and the competition for funding rounds increased. However, as inflation increased, the cost of capital continued to rise which has led to a downturn, where opportunities are now being viewed through different lenses with more conservative projections and valuations. The boom-and-bust cycle is not new, however, some cycles are more extreme than others.

Fortunately for founders, there are still opportunities to fundraise. However, the rules of the game have changed and founders must respond accordingly. 

So, how can founders fundraise in these conditions? It will require founders to manage costs much more carefully, master the art of selling, be hyper-focused on profitability, and look outside traditional investment sources.

Here are five things to keep in mind: 

Shorten your window to profitability and self-fund (if possible)

In this kind of environment, it’s critical for founders to consider bootstrapping their own business and examine their profitability timeline to move out of the red and into profitability more quickly. In any market conditions, self- funding can serve as a top strategy for building a valuable company. 

A company that relies on outside funding all the time is putting itself at the whims of the market, and founders can avoid that if they are disciplined on figuring out what it takes to reach profitability faster. Companies that have a clearer and shorter timeline to profitability are going to be more attractive to outside funders. It’s a two-pronged approach that not only helps the company become self-funded, but it also makes the company more attractive to outside funding.

Of course, being able to self-fund your business is often a reflection of privilege. Fortunately, there are other steps founders can take. 

Create a balance

Overhead and revenue go hand-in-hand, but there’s a balancing act to be played between not overbuilding before the company has grown its revenue. Often what we see in VC funded companies is a lot of money going in upfront in the hopes that it will drive revenue. In these types of market conditions, founders must focus on driving revenue first before building more elaborate tech or expensive teams.

This also demonstrates to potential outside investors that the company is strategically set up to deliver ROI on smaller budgets, showcasing resiliency in a particularly tough market. 

Get good at selling

Even in challenging times, consumers are still buying products and services, they are just being more selective. Can you as a founder effectively demonstrate that you can sell your product, service, or solution even in challenging economic times? Oftentimes, companies succumb to the pitfall thinking that a great product will naturally sell itself—and very rarely is that true. 

Founders will need to fully examine their sales strategy and get very creative in their approach. For example, in some cases it may not be a matter of throwing additional money at marketing. Founders will need to understand the best approach for their company that will drive sales. The companies who can sell and drive revenue will be the ones that survive and the ones who continue to get funded because they will be able to demonstrate continued growth in the toughest environments. 

Look outside of traditional VC sources

VC money is not the only source of money in the world. There are lots of different approaches a founder can take; borrowing from friends and family can be an option or securing traditional bank or mezzanine debt. 

Cash flowing businesses that can service debt are more likely to be able to secure debt. Giving away equity is not the only route nor necessarily the best path for funding your own business. It’s up to you to ruthlessly explore all your options. Even paying an expert advisor or broker can help you put the right kind of capital into your business.  

Leverage all factors within your control

Founders should understand that raising capital is likely to take longer than before. Whereas fundraising might have taken three to six months previously, it could now take up to a year or even 18 months. As a result, founders will need to lever all that’s within their control to demonstrate potential and growth. It’s not impossible. Think about the companies that are household names today that came out of the Great Financial crash of 2008, for example, Airbnb and Uber. 

Opportunities to fundraise are still there if founders can demonstrate they can make it happen despite tight market conditions. Those founders will be the ones that will be able to fundraise regardless. 

Sarah Dusek is the Cofounder of Enygma Ventures