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Here you are, a poised founder looking for funding while stepping into an economic landscape much different from what you were expecting, which is undeniably challenging. You’ve heard venture capital is becoming increasingly difficult to acquire, funds are being selective, and early funding now feels harder to secure than ever.
What are you going to do? Who can you turn to? How can your startup position itself for success in such a tightening market?
Related: You Need to Do These 5 Steps If You Want to Survive the Difficult Funding Market
Funding isn’t disappearing — it’s shifting focus
First thing to remember: This isn’t the first time, and indeed not the last time, venture capital shifts focus due to economic factors. Investors constantly change focus; they’re more cautious in tumultuous markets, especially ones that are difficult to predict, and evaluating companies in such a market comes with heightened scrutiny. But this doesn’t mean your entrepreneurial dreams have to come to an end and be shelved; it simply means adjusting your strategy to align with today’s new market realities.
Having been a founder or co-founder multiple times, the questions you’re facing may seem daunting and insurmountable:
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How do you create and demonstrate value in a risk-averse investment climate?
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What do you need to do in order to “stick out” in a crowded and extremely competitive funding arena?
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How will you anticipate and effectively answer the really tough questions investors are undoubtedly going to ask?
1. You must clearly define your value proposition
In such an environment where investors have quickly become cautious, defensive and deeply analytical of investments, providing clarity and directness are paramount. You must be able to clearly articulate your startup’s value proposition, and it needs to immediately resonate — investors don’t waste their time, and they’re not going to allow you to take too much of it either. They want quick answers to these three critical questions:
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What exactly are you solving for?
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Who benefits the most, how quickly and how significantly?
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What makes your solution unique and different from others, and what makes it defensible?
There’s plenty of research over the past 30+ years that underscores that a clear, concise, and compelling value proposition substantially increases your chance of not only attracting but also acquiring investors’ attention and funding, especially in tight markets. According to venture capitalist and author Guy Kawasaki, “If you can’t explain your startup in one clear sentence, your odds of funding plummet significantly.”
2. Demonstrate real traction and customer validation
Investors today are vastly different than they were in the late 90s during the dot-com boom. Today, more emphasis is placed on demonstrable traction (paying clients), customer validation and early product-market fit that is creating a pipeline. It’s no longer sufficient for just a promising idea, at least for the majority of startups. You must be able to show tangible evidence that your perceived concept is gaining meaningful traction within the market. This is undoubtedly a major milestone to obtain clients, and in doing so you show traction. Unless you’re Sam Altman or the next Google, investors are going to look at traction as a validator, and if you don’t have it, you’re most likely to hear “no” more than “yes.”
According to Harvard Business Review, startups that have early traction and validation from real customers are four times more likely to succeed in raising a formal seed-stage investment. You don’t need millions in ARR — even small, early metrics such as active users, early revenue, retention rates or letters of intent from potential customers is tangible traction that can have a significant impact on investor confidence.
Related: 5 Tips to Win Over Investors in Uncertain Times
3. Master your financial story and funding requirements
No sugarcoating anything here, you need to know your financials. As much as they may be trivial and less meaningful than a Fortune 500 company, they’re crucial in tight funding markets. You’ll need a strong budget that is well-thought-out, financial projects that lean more towards the conservative side depending on your startup and a clear, data-backed understanding of your burn rate and runway — and you absolutely better know how long that runway is with current market conditions.
Research from CB Insights has shown that startups that have had poor cash flow management remain one of the main reasons why they fail. All investors know this, or at least definitely should know, and they’re looking for founders who can confidently manage financial resources effectively through uncertain times without completely falling flat on their face.
You should be prepared to answer these questions with clarity and sincere confidence:
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What will be your uses of the funds, and precisely how will they be allocated?
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If we give you these funds, how long exactly will your runway last, and what is your contingency plan?
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What milestones do you anticipate achieving before your next funding round?
4. Refine your investor strategy and pitch
All investors are different. Some focus on specific industries and have specific requirements they look for. Others have a broad thesis focus and are broader with their requirements. Either way, not all investors are equal, especially within a tight market, so choosing the right investor for your specific situation and approaching them becomes ultra-important. You need to target the right investors whose investment thesis aligns with what you’re pitching. Doing so increases the likelihood that your startup is in the right company, and funding success increases dramatically.
Stanford’s Graduate School of Business advises, “Founders who spend the time identifying and targeting specific investors aligned to their industry, stage, and growth goals are twice as likely to successfully secure early-stage capital.”
Related: The Investment Market Is More Competitive Than Ever — Here’s How Startups Can Still Secure Funding
Adaptability is your advantage
Startups that succeed are those that achieve demonstrable adaptability, clarity, traction, sound financial planning and strategic outreach to aligned investors.
Remember, you’re an entrepreneur. Your greatest strength is resilience and adaptability in a chaotic environment. Use this tightened market as an opportunity to refine your vision, sharpen your strategy as you go and demonstrate to investors that your startup isn’t just surviving but poised to thrive, even with extreme uncertainty.
The current market isn’t your obstacle — it’s your proving ground!
