Is your startup considering raising money from investors right now? Unless you are the CEO of LinkedIn or Twitter, you know that now is not the greatest time to be asking for cash. But what’s it really like out there for people still trying to take on investors? Is it even possible?
A down economy affects startups in several ways. On one hand, it could dry up your customer base. Startups in the financial, enterprise, real-estate, or advertising sectors are being hurt worst because customers are cutting back.
But in addition to the challenge of finding paying customers, the other issue is that investors are scaling back. If it was hard to raise money in the past, it’s harder than ever now.
Sorry, but it gets worse. Not only are investors scarce, but then there’s the issue of valuations…
“Valuations are definitely taking a tumble.” says StandoutJobs CEO, Ben Yoskovitz, “If you’re doing a second round or a bridge round you can expect the valuation to be the same as what you had before or lower. I think a lot of companies are looking at bridge rounds from existing VCs versus new rounds to keep afloat, and existing VCs are keeping more money in their pockets to help out their existing portfolio.”
The interesting feedback I received from entrepreneurs is that, even though things are tough, it is not any more difficult to get meetings with investors.
Toronto startup lawyer, Suzanne Dingwall Williams of Venture Law Associates, agrees:
“It’s still easy to get meetings with ‘investors’. But the trick remains sorting who is actually investing, and who is simply data mining. …. On the VC side, many VCs are either (a) out of money, (b) have money that’s only available to support existing companies or (c) are too busy looking at selling their stakes in the secondary market to be able to focus on you.”
What’s a funding-ready startup to do? Here’s some advice we’ve collected from Canadian startup entrepreneurs and advisors:
- Don’t worry about looking good. Money is scarce right now for everybody, so no one cares where you’re getting it from. If it used to look bad to do many small rounds in a row, to take money on the same valuation as you had before, or to scale back your team, well, do what you gotta do. If your startup is alive and stays alive for the next two years then you’ll be doing better than most.
- Raise an internal round. The easiest way to extend your runway is to make drastic and deep cutbacks. Cut now and cut deep. Then move on.
- Wait. If your company is growing when others aren’t but valuations are half of what you’re looking for, then it might make sense to keep bootstrapping, double your revenue, then ask for a better valuation. Or at least position yourself so it’s possible to do so.
- If you are looking for seed money, forget about it and bootstrap. Get to revenue. Ideas and hype are worth nothing now. Paying customers, healthy cash-flow, and clear paths to profitability are more important than ever.
- Make multiple plans. In the past, it would be bad form to go to a VC and say “we have plans for if we raise 100K, 1M, or 5M” because that would indicate that your plan doesn’t necessarily need a VC. Things have changed.
- Pre-screen VCs. You can waste a lot of time right now meeting with investors that are doing their best not to invest. Ask around, search StartupIndex, and feel free to email me, if you’d like my opinion on who is ‘really investing’.
- Use government funding. “The story for funding for 2009 is how to structure your business so it can attract government money. BDC just got another $300 million this week to deploy in the form of term loans and lines of credit,” says Suzanne. If you talk to experienced entrepreneurs, you’ll receive mixed reviews about BDC loans, but you’d be foolish not to look into them.
- Give up. The businesses that never made sense are going to fail early. But there will be a bunch of businesses that might have been good yet will never see the light of day. It’s okay to put your startup on pause and work for a consulting company; we won’t judge you (as long as you have a secret side project).
Is your company trying to raise money right now? Are you a startup investor? What has your experience been like? Let us know in the comments below!
Speaking of the BDC- Another great way to access funding if you’re under 35 is through the CYBF (Canadian Youth Business Foundation). They provide loans up to $15k. May not seem like a lot but can definitely be enough to help you get off the ground.
I used CYBF when I was starting TalentEgg and still use their resources today (mentorship, connections I’ve made through various events, etc).
Speaking of the BDC- Another great way to access funding if you’re under 35 is through the CYBF (Canadian Youth Business Foundation). They provide loans up to $15k. May not seem like a lot but can definitely be enough to help you get off the ground.
I used CYBF when I was starting TalentEgg and still use their resources today (mentorship, connections I’ve made through various events, etc).
Ali (and Suzy), you hit the nail on the head in a short and precise story of the true state of funding startups.
Ali (and Suzy), you hit the nail on the head in a short and precise story of the true state of funding startups.
Ali,
Some sobering thoughts here. I agree that for the majority of companies looking for $ the picture is bleak, especially in Canada. Still, good companies and good teams can always find money. Deals are still getting done.
The Canadian landscape is not great unless you’re in the mobile space. There are very few sources of cash for new deals other than the Blackberry fund.
One alternative you missed is to goto the US for money. I have done this for 4 out of 5 startups. And I do it earlier and earlier now.
At Tungle we raised $5M for a pre-revenue, pre-launch company. I would never have gone to the US this early in the past.
Ali,
Some sobering thoughts here. I agree that for the majority of companies looking for $ the picture is bleak, especially in Canada. Still, good companies and good teams can always find money. Deals are still getting done.
The Canadian landscape is not great unless you’re in the mobile space. There are very few sources of cash for new deals other than the Blackberry fund.
One alternative you missed is to goto the US for money. I have done this for 4 out of 5 startups. And I do it earlier and earlier now.
At Tungle we raised $5M for a pre-revenue, pre-launch company. I would never have gone to the US this early in the past.
Mark, I think if you have a motto it should be “good companies can always find money” and I think you’re right. I am still afraid that there will be companies with small needs, big hearts, but unproven teams that will never see the light of day because they won’t have the financial resources to get started.
About going to the US, you’re so very right.
Mark, I think if you have a motto it should be “good companies can always find money” and I think you’re right. I am still afraid that there will be companies with small needs, big hearts, but unproven teams that will never see the light of day because they won’t have the financial resources to get started.
About going to the US, you’re so very right.
Ali –
A great article and nothing I can argue with. The US data we have says valuations are taking a hit (anywhere from 25% to 50%!), though I haven’t seen any down rounds on the Angel side of things yet. What I am seeing is stagnant valuations where, even if a company has created a heck of a lot of value, the ‘market for money’ isn’t necessarily recognizing that value. As you say, a tough time to be raising money.
Bryan
Ali –
A great article and nothing I can argue with. The US data we have says valuations are taking a hit (anywhere from 25% to 50%!), though I haven’t seen any down rounds on the Angel side of things yet. What I am seeing is stagnant valuations where, even if a company has created a heck of a lot of value, the ‘market for money’ isn’t necessarily recognizing that value. As you say, a tough time to be raising money.
Bryan
Ali – very nicely written. There are two other options: friends and family and angel investors. Angels invest as much money as VCs and fund many more startups. Recent research in “Fools Gold” suggests that Friends and Family invest about six times as much as VCs or Angels. Here are some suggestions on avoiding the pitfalls in Friends and Family financings http://www.angelblog.net/Startup_Funding_the_Fr…
Ali – very nicely written. There are two other options: friends and family and angel investors. Angels invest as much money as VCs and fund many more startups. Recent research in “Fools Gold” suggests that Friends and Family invest about six times as much as VCs or Angels. Here are some suggestions on avoiding the pitfalls in Friends and Family financings http://www.angelblog.net/Startup_Funding_the_Friends_and_Family_Round.htmlrnrnrnrn
Ali – very nicely written. There are two other options: friends and family and angel investors. Angels invest as much money as VCs and fund many more startups. Recent research in “Fools Gold” suggests that Friends and Family invest about six times as much as VCs or Angels. Here are some suggestions on avoiding the pitfalls in Friends and Family financings http://www.angelblog.net/Startup_Funding_the_Friends_and_Family_Round.html
Ali,
“Startups in the financial, enterprise, real-estate, or advertising sectors are being hurt worst because customers are cutting back.”
It’s precisely times of upheaval that create the right conditions for new entrants to disrupt markets.
Sure, the sectors you name are being hit hard for companies who have clung to the same old broken business models. Dell was started when the PC industry was at an all time low, but they changed the rules of the game and thrived. It just takes a lot of guts (and a bit of smarts) to identify these opportunities and be willing to invest resources into them.
But please continue to spread as much fear and panic as you can. I’ll have less competitors to worry about, and by the time our sector becomes trendy again we’ll be way ahead of the pack.
Ali,
“Startups in the financial, enterprise, real-estate, or advertising sectors are being hurt worst because customers are cutting back.”
It’s precisely times of upheaval that create the right conditions for new entrants to disrupt markets.
Sure, the sectors you name are being hit hard for companies who have clung to the same old broken business models. Dell was started when the PC industry was at an all time low, but they changed the rules of the game and thrived. It just takes a lot of guts (and a bit of smarts) to identify these opportunities and be willing to invest resources into them.
But please continue to spread as much fear and panic as you can. I’ll have less competitors to worry about, and by the time our sector becomes trendy again we’ll be way ahead of the pack.
Hey George. You’re right that at times of upheaval there is also time for opportunity and disruption. We have the same attitude at my company.
If you read the article above, it’s not about how the economy affects revenue (there is enough written about that). The article above is about the difficulties and experiences of raising money.
My only other advice is that during times like this, it’s good to build friendships with others in the same boat. Next time you’re in the area, I’d love to buy you lunch, hang out, and learn more about your business.
Hey George. You’re right that at times of upheaval there is also time for opportunity and disruption. We have the same attitude at my company.
If you read the article above, it’s not about how the economy affects revenue (there is enough written about that). The article above is about the difficulties and experiences of raising money.
My only other advice is that during times like this, it’s good to build friendships with others in the same boat. Next time you’re in the area, I’d love to buy you lunch, hang out, and learn more about your business.
Ali,
would like to know how to reach you and see who is investing in Ontario. We are based in NB and have approached the government, the BDC and banks. Some other techs in the area are not doing well at all and the angels are not moving. We are late beta stage with our software and agree with the bootstrapping, but the technology market is not one that will wait for you either. Any thoughts on access to capital would be welcomed. By the way, the best part is that our potential clients like what we are doing, especially that we have ported our app on the Blackberry. This is what keeps us going, the client feedback.
Ali,
would like to know how to reach you and see who is investing in Ontario. We are based in NB and have approached the government, the BDC and banks. Some other techs in the area are not doing well at all and the angels are not moving. We are late beta stage with our software and agree with the bootstrapping, but the technology market is not one that will wait for you either. Any thoughts on access to capital would be welcomed. By the way, the best part is that our potential clients like what we are doing, especially that we have ported our app on the Blackberry. This is what keeps us going, the client feedback.