How to meet the current capital-raising challenges

Soaring inflation, spiking interest rates, and the impact of the war in Ukraine on the global economy have all significantly affected the ability of start-ups to raise capital.

 AN EMPLOYEE works at website-designer firm Wix.com offices in Tel Aviv in 2016.  (photo credit: BAZ RATNER/REUTERS)
AN EMPLOYEE works at website-designer firm Wix.com offices in Tel Aviv in 2016.
(photo credit: BAZ RATNER/REUTERS)

The plunge of many tech stocks and valuations, soaring inflation, spiking interest rates, and the impact of the war in Ukraine on the global economy have all significantly affected the ability of start-ups to raise capital, leaving executives wondering if they should wait and see what happens, or push forward their fundraising efforts.

Who is most likely to get funded?

The domino effect is in full swing, and it is already virtually impossible to obtain funding with just an idea, no matter how brilliant. There is a need to generate revenue and have a proven product. In this environment, investors are no longer impressed by demos and pilots. They invest in companies that can demonstrate profitability and operate in large and growing markets.

Start-ups with a proven product – one that has market value, generates revenue, and is able to demonstrate sustained growth – feel confident even when the markets are shaky, as they have proven their ability to generate ROI.

Nadav Raanan, CEO and co-founder of Expecting.ai – a digital system that allows intended parents to utilize data and personalization in order to start their surrogacy and egg donation journeys – explains that as a tech entrepreneur operating in an $11.3 billion global market that is expected to grow to $33.8 billion by 2027, his company is standing on solid ground.

Israel Start up (credit: INGIMAGE)Israel Start up (credit: INGIMAGE)

“People want to have kids and they will continue to have kids, even in times of financial turmoil,” says Raanan. “As the demand for surrogates and egg donors continues to grow, I believe that the third-party reproduction market will continue to grow as well.”

Raanan said that as a young start-up preparing for another funding round, “we’ve reevaluated our P2P to make sure we achieve profitability earlier than expected, made sure our burn rates stay low, and increased our revenue stream.”

The times they are a-changin’

“There is a fundamental difference between fundraising in the past and today, in an economic downturn,” said Moshe Redman, Anyverse CEO and innovation expert. “Investors and VCs are more hesitant and meticulous, so naturally everything takes longer. The most significant change is the focus shift. Two years ago, investors focused mainly on market size, revenue potential and scale. Now they also prioritize business metrics such as profitability potential and ROI in markets with solid unit economics.

“I think this change is very healthy. Although it’s harder to get funded, the process is now healthier. The entrepreneurs who will survive are those who: 1) Focus on healthy business metrics 2) Build a business that is also a start-up, rather than founding a start-up that might somehow become a business, and 3) Are able to adjust to the new result- and efficiency-oriented reality, while producing excellent products that people love and use. History shows that times like these are fertile soil for successful companies.”

Three tips from a venture capitalist for start-ups seeking investment

Venture capitalists say that in this challenging financial environment, start-ups should strive for revenue growth and not hesitate to launch their fundraising efforts.

Lena Rogovin is a venture capitalist at Maverick Ventures Israel, a firm that manages more than $150M in assets and invests in early-stage start-ups.

Rogovin advises start-ups in the funding stage to concentrate on generating revenues as fast as possible, and offers some tips for companies starting a funding round.

1) Team. It is important to make sure that all key team members are working full-time in the company. When some of the founding partners are only partially involved, it sends a message that they are not fully invested in the company. VCs are willing to support start-ups with passionate founders who are willing to fight for the success of their company.

2) Transparency and credibility. Be honest and provide an accurate picture of the market, your revenues, and your funding needs, without trying to embellish the financial reality of the business. Venture capitalists are savvy and can easily detect dishonesty. Investors enter these meetings knowing that some uncertainty is always part of the game, and they’re looking for reliable people who can minimize the risk as much as possible.

3) Act now. The last but possibly most important advice: don’t wait. You never know when this economic turmoil will end, and it’s important to remember that many successful companies have been founded in times of crisis, like Uber, which was founded in the aftermath of the ’08 crisis, or PayPal, established during the early 2000s recession.

“My recommendation is to cut costs, improve efficiency, and if the negotiations linger and no decisions are made, move on,” concludes Rogovin.

Itay Asulin from Mangrove Capital Partners – one of the first investors in Skype and whose portfolio includes companies like Wix and WalkMe – explains, “In the current financial climate, when we consider investing in a company, the first thing we look at is whether their product is nice to have or a must-have. Entrepreneurs must understand the market has changed, and multiples are now five times and not six times or higher. Although it’s beyond their control, it still impacts them. The market is a force of nature.”

The writer is co-founder of Expecting.ai