There’s a Specific Strategy For Getting Capital When Sentiment Turns Sour
“There’s only one thing that entrepreneurs have complete control over, and that’s picking the market they want to operate in.” I’m paraphrasing wisdom shared by entrepreneur/investor Jeff Kearl at a conference. Jeff was pointing out there are a host of attributes tied to the market you’re deciding to operate in and you should be thoughtful about that selection. “Attractiveness to VCs” might be one consideration that you consider, but what happens if after you get started building, the market turns and all of a sudden, you’re in a category that investors view skeptically? Founder pain! But don’t worry, there are some tactics you can deploy to try and navigate through.
Before we launch into that playbook though, let me give some examples of how this ‘category chill’ plays out. You can think of it most broadly as an area of innovation which is trendy, new or thought to have high potential. However some high profile failures and/or sub-VC scale outcomes start investors questioning whether it’s worth continuing to fund the problem space right now or is there some fundamental limit on value creation. For example, consumer hardware startups post-Juicero or 3D printing a decade ago. More recently podcasting ventures seem to have only reached exit values which have been solid for founders and angel investors, but well below “fund returning” for multibillion AUM firms.
When faced with this ‘new information’ you, as an early stage founder working in the industry, have a choice to make: have you learned something about this market which suggests you need to pivot away from where you were focused (or ween yourself off venture capital to other forms of funding); or, are you more convicted than ever, having learned from the other startups and using their outcomes to inform your path forward? If it’s the former, well, this post would end right here, so let’s assume it’s the latter: you’re still a believer. Raising capital just got much harder, but here’s how to play it in your fundraising conversations:
A. Don’t Ignore The Elephant In The Room
Leaving the issue undiscussed with potential investors doesn’t mean “whew, we got out of there without hard questions” but instead you missed an opportunity to counter the narrative. Either they’re now thinking you’re naive about your market, or it comes up in their diligence/conversations with their colleagues who express skepticism. You gotta address it — the recent failures or perceived ceiling on exits. Take it head on at the 50,000 foot level and drop one or two insight gems regarding why your company is better positioned. Maybe you’ve spoken with the previous companies customers or investors or employees and learned from that — maybe you’re even now taking their customers, hiring their best team members, whatever.
B. Stop Pitching FOMO Investors, They Won’t Convert
Don’t hug trees because they don’t hug back. Just a weird sales saying I recall someone telling me years ago. Basic meaning is that you more often find success convincing folks who are likely buyers than objection handling for those who are never going to convert.
When your sector goes cold the FOMO momentum investors are never going to get there and I think it’s a waste of time to try and persuade them. What are some signals for these types of investors? A lot of asking who else is involved in the round or inability to tell you what their investment thesis would be for a company like yours — ie they don’t know what specifically they’re trying to figure out.
Instead spend your time on these types of investors:
- Senior Folks at Their Firms: These individuals will have the conviction to make their own decisions and will be less impacted by the groupthink of their partnership or industry. Note, the junior investment professionals working for the senior Partner can be good conduits — don’t ignore them — just a newer, junior General Partner is less likely to make a contrarian first investment at many firms (exceptions exist of course).
- Industry Execs, Former Industry Founders as Angels: Many will want to see *someone* crack the problem they were trying to solve, even if it wasn’t (or only partially) was them. Sometimes they’ll be competitively conflicted if they’re still working in the space, but no harm asking.
- Relevant Corporate Strategics: Often these folks are investing with dual purposes. Yes they need an economic return but they’re also trying to strengthen their ecosystem, whether it’s startups who can be customers, compete against their competition directly or indirectly, and so on.
C. Just Survive
Stop worrying about venture fundraising and just get into survival mode. Bring your burn rate down, crowdfund from your community of users, do whatever you can to make it to the other side of the disillusionment trough. Because if you do, you’ll likely be alone and advantaged when the wind starts blowing at your back instead of in your face.