Top tips for founders seeking investment in 2023
Over the past months, the startup community has been hit particularly hard by economic uncertainty.
As founders navigate a serious market downturn, venture capital firms are reducing their check-writing pace. In November 2022 global venture funding only reached $22 billion, a 69% decrease compared to the $70 billion of investments made during the same period in 20211. The drop is significantly skewed towards later-stage companies, where investments have dropped as much as 80%, while seed funding dropped by a third and early-stage funding halved. This shows that venture funding has impacted startups very differently depending on their size and funding stage, a development that is further highlighted in figure 1 through an analysis of Crunchbase data.
What startups of all sizes have in common though is that raising money has become more difficult and it could get even trickier in 2023. But good preparation and focus can still help founders secure vital funding from investors. Here are 5 tips for entrepreneurs on how to best prepare for their next funding round in 2023:
- Focus on your round: For the CEO, fundraising is a full-time job and it's going to require your full attention, so align with your organisation on what they can expect from you. It can be a good idea to cut down on internal meetings that aren’t essential. Do you really need to attend that weekly sales update meeting or can someone from your leadership team handle it? Offloading some of your responsibilities to other people in the organisation will help you a lot in allocating enough time and focus on securing your next funding round.
- Develop a strong narrative for your pitch: Investor meetings are your chance to talk about what is not evident from your pitch deck already. Before going into investor calls, focus your time on creating a strong narrative. Some founders have a tendency to emphasise product features in detail, but this doesn’t provide the bird’s eye perspective that investors need to gauge your business and future potential. Instead, allocate a substantial portion of your pitch to focus on insights into the market you are entering; how has the market evolved over the past years, how do you expect it to develop in the future and how does your company fit into that future?
- Sharpen your narrative and address tough questions early on: Use the first 5-10 investor calls to identify the "tough" questions and sharpen your narrative accordingly. You should aim to build a pitch that, by itself, addresses the tough questions as early as possible. This is a preemptive strategy which makes it harder for potential investors to “attack” you on these aspects towards the end of the conversation — and you remain in control of leading the conversation to a positive outcome.
- Develop a strong filter: You will get lots of feedback and reactions during pitches to different investors. One important lesson: The feedback you’ll be getting is not necessarily going to be coherent. So stick to your pitch and don’t rush into changing it until you start seeing a pattern in what investors react well to and less well to. If you do see the same type of feedback coming in, that’s typically a good indicator that you need to rethink and refine your pitch — in which case you also need to react fast, so you don’t waste good leads.
- Know your numbers: Make sure you know your metrics and data by HEART. Fundraising is all about selling visions for a potential future outcome - and what ultimately brings credibility and trust to these visions is data. Think about the metrics and data points that underpin your narrative. These metrics differ depending on the type of business you build but Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), Net Retention Rate NRR) and Burn Multiple are some of the metrics you may want to consider. It is also worth noting that for very early stage startups, it is typically more difficult to identify, measure and track the right metrics due to less available data — but it doesn't make it less important. Hypotheses and assumptions can work just as well in those circumstances. Knowing and communicating your metrics effectively enables investors to see and believe that - while your business is currently burning money - there is a road to profitability. And that is what they want to see.
While startup funding has become more difficult in the current recession, it is certainly not impossible to raise money. In some ways it is actually a good time to start and grow your company2. The key to success is a data-driven approach combined with strong preparation and focus. That way you’re able to sell an exciting vision of your company that demonstrates effectively how your business is resilient and able to navigate the current market downturn.
- https://news.crunchbase.com/venture/global-vc-funding-monthly-recap-november-2022/
- https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/if-youre-going-to-build-something-from-scratch-this-might-be-as-good-a-time-as-in-a-decade
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How should a startup business prepare its budget?
To prepare a budget for your startup, begin by listing all potential expenses you anticipate in starting and operating your business. Next, organise these expenses into categories. After that, estimate your monthly revenue and calculate the total costs required to start and run your business.
What are the key steps to creating an effective budget?
Step 1: Determine and track your income sources.
Step 2: Make a list of your cost. Include both fixed and variable costs.
Step 3: Set achievable financial goals.
Step 4: Develop a plan to meet those goals.
Step 5: Put everything together to build your budget.
Step 6: Regularly review and revise your forecast to ensure it remains effective.
What does capital budgeting entail for a startup?
Capital budgeting for a startup involves allocating a set amount of funds for specific purposes, such as purchasing new equipment or expanding business operations. This process is crucial as it supports making strategic investments that are expected to yield long-term benefits for the startup.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How can a startup forecast its cash flow?
To forecast cash flow for a startup, follow these steps:
Step 1: Create a sales forecast by estimating the revenue your products or services will generate over the forecast period.
Step 2: Develop a profit and loss forecast to understand your expected expenses and income.
Step 3: Prepare your cash flow forecast, which involves calculating expected cash inflows and outflows. This can often be done for longer-term by using assumptions around payment terms to forecast a Balance Sheet, and using the movements in Balance Sheet and Net Profit/Loss to calculate the cashflow.
Step 4: Consider ways of improving cash flow by improving your invoicing methods, considering short-term borrowing, and negotiate better payment terms to manage cash flow effectively.
What is the most accurate method to forecast cash flow?
The most accurate method for forecasting cash flow in the short-term is the direct method, which utilises actual cash flow data. In contrast, the indirect method is better suited for longer term forecasting using projected balance sheet movements and income statements to estimate future cash flows.
How is cash flow calculated?
Cash flow is calculated by deducting cash outflows from cash inflows over a specific period. This calculation alongside forecasts of future cash flow helps determine if there is sufficient money available to sustain business.
How do you project cash flow over three years?
To project cash flow over a three-year period, undertake the following steps:
Step 1: Collect historical financial data.
Step 2: Identify all expected cash inflows, which could include revenue, investment, grant income, etc.
Step 3: Estimate all anticipated cash outflows including expenses, suppliers that need to be paid, investments into assets, debt repayments, etc.
Step 4: Calculate the net cash flow by subtracting outflows from inflows.
Step 5: Consider your cash reserves and explore financing options if needed.
Step 6: Regularly review and adjust your projections to ensure accuracy and relevance.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
When should a startup consider hiring a CFO?
A startup should think about hiring a Chief Financial Officer (CFO) when it begins to experience rapid growth, finds it challenging to manage finances, or needs to navigate complex investment scenarios. A seasoned financial professional can provide the necessary expertise to handle these challenges effectively.
What are the indicators that my business might need CFO support?
You might need to hire a CFO or consider outsourcing this role if you notice any of the following signs: a decrease in gross profit margins despite increasing revenue, uncontrolled business growth, lack of cash reserves despite having a financially successful year, or a halt in business growth.
Does my startup really need a full-time CFO?
Recruiting a full-time CFO is an expensive hire. Given budget constraints and the need to prove the viability of your business idea, founders will often need to prioritise investing into building and commercialising their product. That's where CFO services for startups are a cost-effective solution for founders looking to take their financial management to the next level.
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