Startups & Entrepreneurs: A Founder's Toolkit - What One Lawyer is Hearing From Investors About Fundraising in 2023

A great startup attorney has the ability (and, importantly, willingness) to be a strategic and business resource to their clients. I am fortunate to have been mentored and taught by attorneys who believed in this maxim throughout my career.

The fact is that most founders, particularly first-time founders, are not just new to the legal aspects of a startup but the “business” of being in business in and of itself. They have the vision, the idea, and maybe even a first product but have had minimal interaction or exposure to the startup ecosystem. And, they need a guide—acting as that guide is where a startup attorney can genuinely be a “value add” and help set their client up for success.

In the vein of acting as this guide, I plan to dedicate a portion of these Founder’s Toolkit articles to being that resource to a broader audience than just my existing client base.

I want to be careful and note that most of what I will cover in these articles is purposely based on my experience, or “what I am hearing about the market.” It is intended to act as a guide and is certainly not set in stone. Every situation will be unique and with its nuances.

The first of these topics is what I am hearing from investors (VCs, angels and strategics) about the current state of fundraising—in particular, the top 10 most prevalent themes investors have expressed to me about fundraising in 2023.

1. A shift from “grow at all costs” to “path to profitability” – Investors are increasingly looking for pitch decks that outline a path to profitability or at least a path to the next funding milestone. This is as opposed to the 2020-21 period dominated by projects funded on a rapid growth investment thesis.
2. The “Ask” and “Bid” side of deals have flipped – Until around mid-2022, the “Bid” (investor) side was flush with capital, and investors were often the ones seeking out ways in which to deploy that capital. However, this has flipped, and the “Ask” (company) side has returned to its traditional role of seeking out and pitching for capital.

3. Companies should increase their runway – If you have capital, take steps to increase your runway to anywhere from 18 to 36 months. If you are seeking capital, plan for that process to take longer than you anticipate.
4. Explore Venture Debt – This is less applicable to pre-funded companies, but companies that have raised some equity capital should consider venture debt. Venture debt has the advantage of allowing a company to focus on building rather than growing. It also has the added benefit of delaying valuation discussions while the market is uncertain.

5. Be conservative with your valuations – When capital was abundant, and investor competition peaked, many companies pushed valuations beyond even their most optimistic projections. Unfortunately, many of those companies have failed to grow into those valuations and are facing the prospects of a flat or even down round. Establishing a valuation you can grow into within the next 18-24 months may be the safest way to conserve your cap table over the long term.

6. Demonstrate traction – Investors are looking for companies demonstrating customer or product traction. They are investing in these before companies still pushing the faith-based thesis that dominated the last few years.

7. Be opportunistic with talent acquisition – While running somewhat counter to the mantra of decreasing burn, companies with available capital should seek to take advantage of a labor market that is seeing an influx of talent at increasingly affordable compensation packages.
8. Stage matters – Early-stage companies appear less impacted by the current market. Their longer time horizon to exit acts as an insulator from the current market trends – but that doesn’t mean such companies should act as if market trends don’t apply to them or impact valuations. Later-stage companies may benefit from focusing on existing investors and venture debt for near-term funding. Keeping funding internal and adding venture debt can help protect the cap table for both founders and existing investors.

9. It’s not a lack of capital – Plenty of dry powder is available. We are not in a situation where investors lack the capital to invest. The industry is still undergoing growth in the amount of available capital. Investors are now just more particular about where they place that capital – and some are waiting for the “dust to settle.”

10. “Good Companies” still get funded – Last, but most importantly, this point comes with a heavy caveat on the subjective nature of what one considers a “good company.” A consistent theme is that good companies are and will still be funded. Unlike the dot-com or ’08 crisis’, where funding all but stopped, fundings are closing, and capital is still plentiful. It’s valuations and time to funding that are trending back towards their historical means.

So, what should one take from all this? First, this is not the dot-com bubble or the ’08 crisis. Instead, it is more of an expectation reset for all (startups and investors) after a particularly aggressive growth-focused era. But, it’s a paradigm shift that founders should embrace, allowing them to focus on building that next great product or service rather than chasing a “grow as fast as you can” mantra.

Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.

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