As a former VC, I focus on helping Kruze clients pitch venture capitalists - and pitching during a downturn (really, a tech/VC recession) requires special finesse. The dollar volume of venture investments dropped 32% quarter over quarter in Q2, and dropped 50% year over year, according to data from Crunchbase. At Kruze, our clients have still raised over $1.2 billion through the 1st half of 2023, but still, it’s much, much more difficult.
I’ll share some of the commonalities that I’ve seen across our clients who have raised to help you prepare for your fundraising efforts. That being said, since valuations are down and term sheets are hard to get, if you can it may make sense to delay your outreach and focus on growing your startup. Not every founder has the luxury of time though, so let’s dive in.
How to Successfully Pitch for Funding During a Downturn: A Guide for Startups
Venture capital fundraising has recently become a more selective process. In light of a slower deal-making environment and with heightened investor caution, founders are finding it a lot harder to secure funding. I am seeing startups get term sheets and close rounds though, and this guide aims to offer practical tips for startups seeking capital during a downturn. Here are the 10 tips; I’ll dive into more detail further down the page.
- Be realistic with valuation expectations
- If you need to do a downround, get your existing investors on board first
- Emphasize your business model fundamentals
- Explain the economic environment’s impact on your market and clients
- Traction, traction, traction
- Appeal to VCs innate desire to be contrarian
- If AI can help your business, highlight it
- If you have them, practice the pitch on your existing investors
- If you’ve operated in a downturn before, explain how it helps you now
- Begin your pitching process earlier that usual
Diving in: 10 tips on pitching during a downturn
Being realistic with valuation expectations is essential during a downturn
Gone are the days of sky-high valuations and inflated projections. The chart below is using data from Pitchbook (it’s also on our startup statistics page). See how far valuations have fallen since the boom times of 2021.
For founders, it’s crucial to have a realistic and conservative valuation that takes into account the current market conditions. If a VC asks you what your valuation expectations are and you come back with a 2021 sized number, they are going to pass. While it’s painful, be realistic.
If a downround is unavoidable, engage with your existing investors early.
You need your existing investors on board if you need to do a downround. Their support can help maintain credibility and momentum during the fundraising process. More importantly, if you need to change up the capitalization table, new investors will want to know that the existing investors are onboard. You may need to do an inside-led round to clean up the cap table prior to going to outside investors, as many VCs don’t like to lead these kinds of deals. Read our guide to downrounds here; it covers many, many tips and steps you should consider if you are currently overvalued.
Emphasize Your Business Model Fundamentals and Economic Viability
When pitching during a downturn, a clear and compelling articulation of your startup’s business model becomes critically important. It’s not enough to simply outline your long term growth strategy; you should be prepared to highlight the details. For example, talk about how your startup maintains sound unit economics, both now and projected through to the next funding round. If you don’t have good unit economics now (in particular gross margins and attractive customer acquisition costs), have a clear path to making them industry leading. By letting the investor know that you are thinking about these metrics, and that you have a plan to improve them, they’ll hopefully get the feeling that you’ll be a good steward of their capital.
Show your ability to manage burn rates and transition to a more cost-effective model, if necessary. You may need to talk about hard cuts that you’ve already made and how the company has grown through them.
Be ready to provide concrete data and realistic forecasts that validate the feasibility of your business model, your skills in managing tight resources, and your capability to navigate through the economic downturn successfully. Basically, you are showing that you are thinking about the fundamentals in a way that prove that you’ve got a good underlying business and that you are going to be great at effectively and efficiently managing the venture dollars that you raise.
Explain the economic environment’s impact on your market and clients
Your pitch needs to include a thorough understanding of how the current economic situation affects your industry and customer behavior. Investors are going to over rotate on how the market impacts your market, so don’t be defensive. Instead, go on the offensive and prove how deeply you understand the market by explaining the customers’ points of view, and how your solution plays into their current situation.
Of course, if your customers are dramatically cutting back purchases in your market, then you’ve got to face reality and be realistic. In this case, again start with making it clear how deeply you understand the market, then outline how you are strategic and adaptable in the face of adversity.
Investors always love traction. In the startup pitch deck course I put together with a leading pitch deck consultant, Haje Kamps, we talk about pulling the traction slide forward if you’ve got strong customer metrics. It provides concrete evidence of your startup’s viability and market acceptance. Whether it’s user engagement, revenue growth, or partnerships, make sure to highlight your startup’s significant milestones.
If you don’t have traction, hopefully this is because you haven’t already tried to launch. In today’s difficult market, it’s very hard to raise capital if you’ve tried and failed to achieve traction. However, if that is the case, clearly explain what you’ve learned, not the failures, and lay out how your new strategy (with the new capital) will spark growth.
And if you are simply too early-stage to have tried to get any growth going, you won’t have to explain why you don’t have traction yet - simply say you haven’t really launched yet or begun GTM yet. BUT, the flip side is that investors are looking for a smart, capital-efficient plan to kick off traction (see the business model section above).
Appeal to VCs innate desire to be contrarian
Many successful VCs, like Fred Wlison, made fortunes by betting against the crowd. Even more love to talk about how they are contrarians and that’s how they make their money. Emphasize how your startup offers a unique proposition in the current market and why it’s poised to succeed where others may falter. You don’t want to explicitly say “the time to be a contrarian investor is now!” but you want them to come away from the conversation thinking that.
If AI can help your business, highlight it
If artificial intelligence is a part of your strategy or technology, you have to mention it. I hate to be the person who recommends jumping on the bandwagon, but like it or not, AI is hot and AI funding is the thing that VCs are obsessing over in the middle of 2023. PitchBook is saying that early-stage AI startups saw a median valuation of $100 million in 2023, vs $38 million for other startups. Like all fads, this will eventually cool down, but at the moment, if you have a legitimate AI angle that you can credibly add to your pitch, then you should.
Practice the pitch on your existing investors - if you have them
Before reaching out to new investors, try your pitch on your existing backers. Their feedback can provide invaluable insights and help you refine your message. This is, of course, something that is best practice for any startup that is pitching; use your existing professional investors as a sounding board. But in a downturn, this is a critical step to pitching new investors. Discuss valuation expectations, the traction, how your end market is dealing with the downturn, etc.
If you’ve operated in a downturn before, explain how it helps you now
Prior experience navigating a downturn can be a significant advantage. Share these lessons learned and how they have influenced your current strategy during your pitch. And it’s entirely possible that you have ridden through more downturns than the VC that you are pitching, so sharing what you know is a great idea. However, I strongly recommend against preaching at them - instead, invite them along or into your journey. VCs can be a bit headstrong, and usually respond better to “learning a secret to success” vs. being told how something works.
Begin your pitching process earlier that usual
Given the slower deal-making pace during a downturn, it’s wise to start your fundraising efforts much earlier than you would have a couple of years ago. The time where a founder could get a term sheet in a week are over - VCs are taking their time, doing diligence, taking multiple meetings before beginning to negotiate. It’s hard to raise funding now, like it was before the 2021 bubble, so expect everything to take longer. I recommend soft-discussions with your possible next round investors 6 to 9 months prior to beginning a process. VCs love to have a real relationship with founders, and this takes time. Additionally, given how hard it is to execute, if you meet with them 6 months in advance, and tell them your near-term goals and plans, and then send great “investor update” emails to them over the next few months as you hit your goals… well, you’ve just proved to the VC that you can operate during a downturn.
This may be the biggest tip of the entire bunch if you are actually executing well. VCs are looking for proof that you can execute during a downturn. While it’s nice to try to prove that during a pitch, it’s even better if you do it over the course of months. Meeting early, even if just for coffee, mentioning several key goals and when you’ll hit them - then following up, on time and on your operating plan when you achieve those goals will dramatically increase the VCs view of your ability to execute during a downturn.
Concluding thoughts and additional resources for founders pitching during a downturn
In a challenging economic environment, effective pitching becomes an art of balance - showcasing optimism about the future, while demonstrating a solid understanding of the present realities. It requires detailed planning, impeccable execution, and above all, resilience. As we have discussed, understanding the market’s shifting dynamics, being realistic with valuation expectations, appealing to VCs’ contrarian instincts, and emphasizing your business model’s viability are all crucial elements of a successful pitch during a downturn.
Startups that manage to secure funding during downturns often possess qualities such as sound business fundamentals, a profound understanding of their market, and a demonstrated ability to adapt. The best do more than survive downturns, they thrive and emerge stronger because of them. Ok, sometimes it’s also the luckiest that thrive during a downturn.
Remember that fundraising is not just about obtaining capital - it’s about building relationships and trust. This becomes even more crucial in a downturn. Your existing investors can serve as a sounding board and an invaluable source of advice. They’ve invested in you, after all, and they want to see you succeed.
For those of you looking for more resources to guide you through this process, I’ve published a selection of top VC pitch deck templates on the Kruze blog. We also have an entire startup pitch deck course. These resources are designed to guide you through every stage of the pitch process and help you tailor your message to the unique circumstances we’re facing today. Additionally, we have financial model templates that you can download and use to plan your budget and the financial section of your pitch.
In conclusion, remember that while challenging, downturns also present unique opportunities. With the right approach, careful planning, and a healthy dose of perseverance, many startups will successfully pitch and raise capital during a downturn.