There is no better time to be a startup, yet fundraising takes a good deal of grit and resilience. It also requires a solid understanding of market trends, investor sentiments, and evolving strategies. As entrepreneurs strive to secure funding for their ventures, they encounter a multitude of challenges and opportunities shaped by economic shifts, investor preferences, and industry dynamics that mean you need to “know your stuff” and be willing to go to battle.
CRISPR QCs founder Ross Bundy knows. With almost a decade of entrepreneurial experience in the biotechnology sector along with co-founding and scaling two successful companies, Cardea Bio Inc. and CRISPR QC (both of which are transforming the fields of diagnostics, therapeutics, and bioinformatics), Ross understands the nuances of securing investments in today’s competitive landscape.
In recent years, the startup fundraising ecosystem has witnessed significant transformations. Traditional approaches to fundraising, once reliant on compelling narratives and visionary promises, “are now subject to greater scrutiny and discernment,” Ross asserts. “Investors are wary of past pitfalls and keen on mitigating risks. They are demanding more robust business models and tangible proof of viability.” Good ideas are great, but great companies are investable.
Ross shares that in the past, the process of raising money for startups was often perceived as easier. Entrepreneurs could rely on a compelling narrative and their ability to articulate their business ideas to secure funding. “Investors were more focused on the story being told rather than thoroughly vetting its feasibility. As long as the pitch sounded convincing and the entrepreneur seemed capable, funding could be obtained relatively easily.”
However, this approach has shifted in recent years due to increasing scrutiny as to the validity of startup claims. “There have been several fraudulent startups publicized. These cases highlight how companies promise transformation but lack the ability to execute.” As they say, one bad apple can ruin it for the whole bushel.
Bundy shares that it is now a fallacy to think a company can rely solely on captivating narratives. “An overemphasis on personalities rather than substance can be a startup’s downfall. Now a compelling narrative has to be backed up with founders who showcase a vast amount of expertise and have proven they can capitalize on their promises and move the needle.” Ross explains further, “The key question for investors is whether they are backing diverse talent capable of being the next Steve Jobs or Jeff Bezos.” Entrepreneurs failing to recognize the importance of diverse skill sets on their team could be a startup killer.
Ross asserts, “Startups need to focus on building solid businesses by prioritizing factors like revenue generation, profitability, and customer satisfaction. While storytelling and fundraising are important, it’s crucial for startups to also deliver tangible results and demonstrate their ability to execute on their business plans. This practical approach not only attracts investors who value real metrics but also increases the likelihood of long-term success in the competitive startup landscape.”
He also advocates for transparency. Investors want startups to be clear about how they make money right from the start, even in the early stages of development. This change is happening because investors are looking for companies that can grow steadily, especially during economic downturns. “Startups need to communicate openly and honestly about their finances, following proper accounting rules to show how they’re making money. Startups must focus on creating reliable income sources to stay strong, especially when the economy is uncertain.”
The Importance of Understanding Investor Thesis and Alignment
Investor criteria play a pivotal role in shaping funding decisions within the startup ecosystem today. Ross emphasizes that founders need to understand the investor’s vision and thesis. He asserts, “Every venture capital firm is a startup, too. VC firms, much like startups themselves, operate with a clear investment thesis and actively seek out opportunities that align with their strategic objectives. One emerging trend in the investment landscape is the growing interest in sectors like Agtech, where innovative solutions are anticipated to drive future growth.” He advocates for understanding that VCs have a product that they’re selling — and the product is stories, “you can see that when you look at a lot of VCs’ websites.”
Ross shares a prime example, “My friend started a venture fund at just 23 years old, focusing on addressing the underserved needs of Gen Z. Being a Gen Z herself, she was adept at identifying promising companies within her demographic. She successfully raised funds and advocated for these startups, capitalizing on her understanding of Gen Z’s potential. Her initiative helped bridge the gap between older investors and the emerging Gen Z market, establishing her as a discerning investor within her generation.”
Impact of Recent Economic Changes on Venture Capital Availability
Another reason VCs are becoming more selective about where they invest is because recent economic shifts have reshaped the availability of venture money. Bundy explains that baby boomers used to invest a lot in mutual funds, which increased the value of the overall stock market and pension plans, which in turn made capital more available for risky ventures and funded venture capitalists. When the stock market did well, more money was freed up for risky ventures like startups. As interest rates and inflation have gone up, it has become harder for venture capitalists to get money.
“When there was lots of money available, many new venture funds popped up, leading to more competition among startups for funding. But now, with less money around, it’s tougher for startups to get funding, as venture capitalists are more careful about where they put their money.”
Ross shares, “I think it’s going to be a bloodbath this year. There will not be near as many newer funds. And then that has a knock-on effect on startups, too.”
Navigating the Challenges
With these funding constraints and heightened competition, what does a start-up do? Ross advocates for resilience and resourcefulness. Sharing his own strategies, he recounts his diverse approaches to fundraising, from PR to leveraging networking opportunities:
- Utilize media coverage, share on social sites, and attend events in your industry to increase your visibility and build your network.
- Enlist the help of a strategist to develop communication strategies that are aligned with business objectives and that can help you build connections with potential investors.
- When approaching potential investors, it’s crucial to understand their investment thesis and what they’re looking for. This helps determine if your company aligns with its goals. Ask about their vision and what stage of companies they invest in. This helps filter out mismatched partners.
- Consider if the investor is actively deploying capital and if they’re at the same stage as your company. It’s like speed dating to find the right fit. Understand their motivations and what value they can add to your company. Investors want to feel involved and know you’re thoughtful about the relationship.
- Communication is key. Investors want to be kept in the loop and feel like they’re part of the journey. Don’t just pitch your company; show that you’re willing to collaborate and value their input.
Some Last-Minute Lessons Learned
Ross’s reflections on past fundraising experiences are invaluable for aspiring entrepreneurs. He highlights the pitfalls of failing to appreciate investor feedback, stressing the importance of honesty, humility and adaptability throughout the fundraising process. And he emphasizes embracing constructive criticism and demonstrating a willingness to address challenges head-on.
“Communicating complex value propositions effectively is crucial for entrepreneurs seeking funding.” Ross suggests, “Use analogies to simplify intricate concepts and tailor pitches based on the investor’s level of understanding. By making the business proposition accessible to a wider audience, you can increase their chances of securing funding.”
Bundy also emphasizes the need to comprehend the implications of different investment types, such as safes, notes, and warrants. Leveraging this knowledge allows entrepreneurs to structure deals that align investor interests with the company’s objectives. Additionally, he asserts, “Negotiation strategies play a crucial role in shaping the terms of investment agreements. Structuring a deal that mitigates risks and maximizes returns for both parties involved is key.”
Navigating startup fundraising today demands resilience and market understanding. Prioritizing solid business models with strong leadership and proof of money-making instead of just captivating narratives is key. Transparency, practicality, and an understanding of investor preferences are crucial to surviving as well. By embracing Ross Bundy’s insights, “Startups can position themselves for success amidst a challenging market.”
