3 Things You Should Care About When Fundraising
In the world of startups the answer to almost all questions about the future is “it depends.” Will enough people buy my product?
It depends. Does it solve a problem?
Will VCs like me and want to give me money?
It depends. Have you started a successful company before?
Will VCs ignore my emails and phone calls?
Yes, they will.
When it comes to raising money there are a lot of factors to take into consideration: Does your business model work? Is there a market and is it big enough for a VC investment? How much money do you really need? Where will you find talent? And so on.
But what about other factors, like: Is it a good time in the economy to raise money? What are the hot industries? And what are current VC investment trends?
Getting an understanding of these external factors can help you to make informed decisions. Afterall, wouldn’t you want to know if now were a better time to raise than next year? Or if VCs are slowing down investment in your industry?
1- If Interest Rates Are Low, Money Is Cheap: Raise Now.
Money is lent and borrowed at a cheaper rates. The Fed decreases interest rates so that there is more money flowing through the economy. Among other things, the benefit is that more money in the economy stimulates growth. For VCs, to put it overly simple it may increase their access to cash and in turn they invest more.
Take a look at the chart Total VC Investment & Interest Rates INDEXED below. You can see that as the interest rate decreased, investment increased. We cannot say for sure that there is a cause and effect relationship between the two, but from this point of view it looks like there is. Why go against the trend?
Many think that the Fed will raise the interest rates in December. Although, this would not be felt immediately in the VC world, it would be a good time to get moving on raising now.
VCs, in a way, are similar to startups: they go around to investors (banks, companies, universities, etc) and raise funds for their business. The difference is that their business makes money via a portfolio strategy: they invest in a number of companies and expect that a certain number will give them a nice return. Your business is selling something for a higher cost than it costs you to produce/service/etc.
VC funds are expected to last a certain amount of time. That means that startups should not feel the effect of an interest rate change until VCs go out to raise their next fund.
2- Not All Industries Are Created Equal
VCs invested billions in software companies in 2014. And 55 million in Telecommunications. Which industry would you rather be in if you are seeking VC investment?
Taking a look at the trends can help you decide if going after VC investment makes sense for your business.
The industries most invested in 2014 were software, biotech and media and entertainment. Being in an industry that has a lot of VC money flowing means there are more opportunities from the entrepreneurs’ side: there are going to be more prospective investors for you to work with. The more investors there are, the more likely you are to find someone who also shares your vision.
The industries that are the fastest growing in terms of VC investment are business products and services, electronics and retailing. Since 2012, they have seen an average increase of 1.6X to 2.3X year over year. This likely means that these industries are growing and projected continue to grow quickly.
If your business is in one of these industries, it may be a good time to seek investment from VCs.
Venture capital is invested in industries that require a large initial investment but also have the possible reward of quickly becoming a market leader. Usually these are for new technologies or products. If you remember, Facebook was not the first social network but it was able to beat out competitors. Would Facebook have been able to pull this off without VC investment?
The higher the risk the greater the opportunity for higher reward.
All technologies will become outdated. Some industries continue to grow but others, like IT Services, Networking and Equipment, Semiconductors and Telecommunications, go into decline, receiving less VC investment.
If your business is in one of these declining VC industries, investment is likely not the best option for you. Less money being invested in these companies means less opportunity for you to find the right VC match. And even if you are able to get funding this time around, you may have more difficulties to get it for your next round.
3- Your Startup’s Stage Matters
Since 2009 there has been a significant increase in the number of early stage companies receiving VC investment. Seed stage is trending down, while the number of deals done for expansion stage and later stage is more or less flat.
If your business is in the early stage, now may be a good time for you to seek investment.
In general, the size of the deals have been increasing, but expansion stage startups are seeing the largest increase, going from an average of $4 to $6 million to over $10 million per deal. An additional $4 to $6 million dollars goes a long way.
Conclusion: if you are an early stage or expansion stage startup in the software, biotech and media and entertainment, while interest rates are low, now is the time for you to be raising. Even if you do not need the money tomorrow, get funding while the money is flowing. You never know what it will be like tomorrow.
Just remember to be wise with the cash that you raise. You do not want to get caught up and burn $200 million without even having a sustainable business model.
Data Sources: federalreserve.gov and PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report (Q3 2015)