Raising VC and finding that 2 year runway during a recession

So you are pivoting to be an entrepreneur during a recession, and it looks as easy as

1. deciding on your new business.

2. Making a beautiful pitch deck and joining an accelerator, and

3. Pitching to VCs at a demo day to finally get paid...

or is it??

Raising venture capital (VC) during a recession can be challenging, but it is possible. With the right strategy and approach, your startup can still secure funding and find the 2-year runway needed to survive and thrive during tough economic times.

TLDR: Tune into Henry Wong and hear a 4 x VC Fund, 5x trade sale CEO and VC with triple-digit returns, share the VC Acid Test we use at R3I CAPITAL

One of the first steps in raising VC during a recession is to focus on your business model and revenue streams. Investors are more cautious during a recession and will look for companies with strong and resilient business models that can withstand economic downturns. Your Startup should be able to demonstrate how it will generate revenue and how it will be profitable or secure that trade exit in the long term.

Problem and Solution

1. The first filter for our VC Acid Test is: What problem are you solving? Are you solving the root cause?

Here I ask myself the five why's to ensure I am not just solving the symptoms)?

Does it need to be solved right now??

Is this solution going to be oxygen, aspirin or jewellery?

• Oxygen - the customer can't live without it (think regulatory-enforced solutions)
• Aspirin - it solves a pain for a customer, but it's not oxygen.
• Jewellery - it is nice to have, gives the customer bragging rights or some other form of altruistic personal return (i.e. brand personifies values that tie into their personal identity etc.)

Hint - The best solutions to back are all 3!

And then I ask myself the 7 "so what's" to make sure that I understand the unintended consequences- which is usually discovered after the 5th so what.

Cohesive and Diverse Team

This is the most critical factor. We invest in people first. Investors will be looking for startups with experienced and capable teams with the skills and expertise to navigate a recession and grow the business. Startups should be able to demonstrate the strengths and qualifications of their team members and how they will be able to execute their business plan.

There are only two reasons a company fails at the beginning - 1. the founders give up - or 2; they need more money.

I want to see that you are not the team that will fall apart when things get complicated. How cohesive are you? What have you built together or endured together in the past? Why will you be different or the same this time?

What about your team makes you the best qualified to solve this problem?

Discover your own and your teams fingerprint for success . Is your team cohesive and do you all have what it takes to exit a company valued between $6M-1.2Bn or to deliver intergenerational returns beyond 10 years?

Diversity and Inclusion

Diversity and inclusion are essential to you and your investors for several reasons.

First and foremost, diversity and inclusion are essential for driving innovation and creativity. Studies have shown that diverse teams in terms of race, gender, age, and other factors are more likely to develop new and innovative ideas and solve problems more effectively.

By fostering a diverse and inclusive environment, my investors and I can tap into the full range of available perspectives and ideas, leading to significant business advantages.

Additionally, diversity and inclusion are essential for attracting and retaining top talent. Companies that are perceived as being inclusive and welcoming are more likely to attract and retain the best employees and to foster a sense of loyalty and engagement among their workforce. This is particularly important in today's competitive job market, where top talent is in high demand.

Diversity and inclusion are also crucial for building stronger customer and stakeholder relationships. Companies perceived as being inclusive and welcoming are more likely to be trusted by their customers and stakeholders and to foster stronger relationships with them. This can lead to increased sales, loyal customers, and brand loyalty.

Finally, diversity and inclusion are essential for staying ahead of the curve regarding social and cultural trends. As society becomes more diverse and inclusive, companies that can stay ahead of these trends will be better positioned to succeed in the long term. By fostering a culture of diversity and inclusion, my investors and I can ensure that we can stay ahead of the curve and relevant in today's rapidly changing business landscape.

In short, diversity and inclusion are essential for driving innovation, attracting and retaining top talent, building stronger relationships with customers and stakeholders, and staying ahead of the curve regarding social and cultural trends. We know that a diverse and inclusive environment is essential for long-term business success, and we are committed to fostering such an environment within our organization.

Market

Another essential factor to consider is the size of the market opportunity . Why? because Market sizes drive valuations.

Market Size

So How big is the market - and how fast is it growing?

If you are sitting in a small market, move into a bigger one before raising cash - and show traction on the growth trajectory!

Better a founder riding the tip of a wave proliferating - than one that has already subsided and trying to swim against the tide. Or if it is in decline, how are you helping those customers save money or drive efficiencies, or meet regulatory standards faster? That will ensure that your startup's solution is oxygen, not just a painkiller.

Where can you play and how can you win?

Did you know about the geographic abritrage? That you can secure up to a 70% increase in valuation simply by taking your company out of a small market and gaining traction in a large market?

Competition

Do founders often say they have no competition? But a customer doing nothing or using paper is a substitute.

• What's the real likely Competition?
• How will you compete?
• Are you a better mouse trap or 10x differentiating?

If there are no patents, no secret sauce, and you are swimming in a red ocean in a mature market, how will you be able to dominate a niche - i.e. a big niche?? Is there a specific large geography? Or a particular customer segment? Could you make sure it's coherent?

Go to the market and return.

What's your go-to-market, and what is the likely customer acquisition cost?

Investors will be looking for companies addressing large and growing markets rather than niche markets that may be more susceptible to economic fluctuations.

You should demonstrate the size of the market they are addressing and how they plan to capture a significant share of it. We need more than 15m to secure 1M, especially in a recession.

Cap Table and Capital Sources

Who has invested in you, and are they smart capital? We invest in you just as much as in who is also at the table with us.

Sources of capital and quality of capital do matter. How is that capital source going to add value to your company? Where does that capital come from? Are we exposed reputationally as a firm if we stand beside them?

A critical aspect of staying nimble is having a solid financial plan. This means clearly understanding your company's burn rates and runway and being able to adjust those numbers as needed. You should be able to demonstrate your financials to investors and to be able to communicate how your company will reach profitability and return on investment.

There are many sources of grants and philanthropic funding available in deeptech. Be wary of taking on too much debt. There is always a date of reckoning. Achieve your R&D milestones with non-dilutive government funding if at all possible - but be conscious of the fineprint - make sure you are not giving away your IP in the process.

Seeking alternative funding forms, such as government grants, crowdfunding, and angel investors, can be very advantageous. While traditional VCs may be more cautious during a recession, other funding sources may be more willing to invest in you. You must demonstrate the potential and upside if you want government grants and other forms of funding to help you reach that 2-year runway.

NB Governments will not fund a company in financial difficulty.

A solid understanding of the investor landscape is essential to raising VC during a recession. This means identifying the VCs still active during a downturn and understanding their investment criteria and preferences.

Can you demonstrate how your business aligns with the VC's investment thesis and how your company can add value to our portfolio?