Raising Startup Funding Used to Be Easy—Not Anymore
In 2021, when Roshan Patel is raising start up Walnuts In the first round of funding, his email inbox was flooded with interest from investors. Venture capitalists loved his idea of applying the concept of buy now, pay later, $100 billion industry, to health care bills. Patel raised $3.6 million that spring, and stayed in touch with a number of investors who could make more money as the company grows.
But when Patel sought a second round of funding in February — after the market publicly fell — investors were less reticent. Now, VCs have questioned him about unit economics, sales performance, and the path to profitability. “These are questions I expect to come later,” says Patel, as the company matures. When he educates investors about the startup’s mission and goals, “it’s like, ‘OK, but what about the finances? ” 90 percent. In May, he closed a $10 million round, with another $100 million in debt financing.
To date, publicity and cryptocurrency market decide down, and VC sponsor-festival 2021 passed. Meanwhile, startup founders face a hangover. According to a report from Crunchbase. Early-stage funding is down 18%, showing that mass-market trouble has now reduced to smaller startups, which tend to be more sheltered from economic disasters. The sudden change has frustrated some founders and left others regretting they didn’t raise money sooner.
“Time is everything,” says Emily Smith, founder of the tech startup. TeleTeachers, who began raising his Series A in April. “If I had decided to fundraise a few months earlier, I think I could have closed it and moved on. But it’s not the fall of 2021 anymore.” Smith is still meeting with investors.
Smith said her startup has enough money in the bank to last longer as funding declines, but is worried about the company’s valuation. Valuations in early-stage rounds fell 16% in Q2 2022, according to a report from Pitchbook– the first drop since the start of the pandemic. If a startup is undervalued, founders may be tempted to give up too much equity to increase their total funding and face future fundraising problems.
At the same time, overvaluing can also create problems. Last year, 340 companies reached unicorn status, with a valuation of over $1 billion. Some have since been brought down by market shifts and many are scrambling to cut spending or lay off employees. Some have had to deal with the “bearish cycle,” accepting new investments at lower valuations than before. Klarna, the buy-now, pay-later pioneer, raised $800 million from investors in June but had to lower its valuation from $46 billion to $6.7 billion — a drop in value about 85%.