Thread by @fintechjunkie

The #1 responsibility of a Founder is to make sure their company doesn’t run out of cash, but raising capital in today’s market is TOUGH.

Here’s a quick framework for determining how challenging it will be for a #startup to raise new #VC capital.

Is your #startup ready? 🧵👇

The first truism that should be internalized is that the playbook for raising capital in 2020 and 2021 won’t work today.

The past few years were anomalies and everyone’s expectations should be reset.

Raising multiple rounds of capital based on team and TAM won’t work anymore.

While there are many VCs, most startups will have a tough time raising capital in this market if they don’t show well on 5 major dimensions:

👉Very Few Leaps of Faith
👉Material POSITIVE Progress
👉Insider Support
👉Capital Efficiency
👉Realistic Expectations

VERY FEW LEAPS OF FAITH

In this market, it’s rare to find an Investor who’s receptive to a business that requires multiple leaps of faith or to a pitch that tries to convince them that their understanding of an ecosystem might be flawed.

One example of a tough model to fund: Build a large user base now and crack monetization later.

These “Act II” businesses typically consume loads of capital building “Act I” before “Act II” is even possible.

The de-risking doesn’t start until significant capital is deployed.

In this market, Founders need to find Investors who already believe in their theses and understand the dynamics of their ecosystems.

This isn’t a good time to convince skeptics. This is an environment for inviting those who already believe to go on a journey with you.

MATERIAL POSITIVE PROGRESS

Building a startup starts with an idea backed by some combination of research, intuition, experience and a huge number of assumptions. The goal of a Founder is to learn every day and adjust the business based on these learnings.

Every new learning is either proof that a startup is on the right path (positive proof) or proof that the market reality and the startup’s assumptions aren’t in sync (anti-proof).

Positive proof helps the fundraising story.

Anti-proof hurts the fundraising story.

But fundraising is all about selling the future vision and potential economic outcome of a business to an Investor, and in this context positive proof and anti-proof play critical roles. They anchor the narrative and set the context for diligence.

Positive proof is evidence of de-risking and confirmation that the prize is worth the effort.

Anti-proof is evidence that the business is more difficult to build than anticipated and brings into question whether the projected outcome is even possible.

And to an Investor, positive proof and anti-proof aren’t equals. One piece of anti-proof could kick off a stream of additional questions. Or it could drastically impact deal terms.

And in today’s market it’s a convenient excuse for an Investor to walk away.

The truth is that in today's market, startups need significant amounts of proof and no anti-proof to be fundable by a new Investor.

If anti-proof exists then the company will likely need to pass the hat with existing Investors to fund until the anti-proof is in the distant past.

INSIDER SUPPORT

VCs are doing what they can to protect and support their best companies given today’s fundraising environment.

Most VCs have gone through the exercise of ranking their existing companies and have prioritized follow-ons in their very best companies.

Insider rounds have gone from being an historical signal of weakness to a real signal of strength.

Round extensions have gone from the exception to the rule.

The result is a tangible reduction in quality for in-market deals without significant support from existing Investors!

Existing Investors have an information advantage over new Investors so not having significant insider support can kill a company’s chances of raising capital.

And “not having capital” isn’t an acceptable answer.

It’s signal that new Investors are trading on.

CAPITAL EFFICIENCY

Disciplined Founders who can de-risk and scale a startup EFFICIENTLY are in favor. They know how to maximize learnings, scale costs carefully and stage their ambitions.

Overly zealous Founders are out of favor because they’re really good at burning cash.

The most fundable businesses have paths to profitability at reasonable levels of scale.

The most fundable businesses consume modest amounts of cash to “de-risk” their models and tighten their assumptions.

The most fundable businesses focus on costs as much as they do revenues.

REALISTIC EXPECTATIONS

Before raising capital in today’s market, Founders and Investors have be ready to accept terms that reflect today’s market conditions.

Public comps have corrected by 40-90% and this is rippling through the private markets ecosystem.

The truth is that if a startup has 3-4Xed since its last raise it might have grown into its last valuation. In this market a flat valuation is a win for many startups with inflated valuations.

There are exceptions, but it’s best to internalize today’s reality before raising.

And Investors want to make sure startups have the right quantum of capital to achieve their next set of milestones.

It’s not OK to raise enough money to get 80% of the way to Mars so Founders will have to accept more dilution than they did when capital was easier to raise.

The TL;DR: Today’s market for VC capital isn’t the same as yesterday’s. To succeed, Founders need to internalize what new Investors are looking for.

It won’t be easy, but the best startups will survive the gauntlet and raise the capital they’re looking for!