Raising Startup Funding Used to Be Easy—Not Anymore
In 2021, when Roshan Patel was raising his startup Walnut’s first round of funding, his email inbox overflowed with interest from investors. Venture capitalists loved his idea of applying the fast-rising concept of buy-now, pay-later, a $100 billion industry, to health care bills. Patel secured $3.6 million that spring and kept in touch with a few investors who might chip in more as the company grew.
But when Patel sought a second round of funding in February—after public markets took a nosedive—investors were less warm. VCs now drilled him with questions about unit economics, sales efficiency, and a path to profitability. “These are questions I was expecting to come later,” when the company was more mature, says Patel. When he walked investors through the startup’s mission and goals, “it was like, ‘OK, but what about the financial stuff?’” Patel stopped pitching Walnut as “Affirm for health care,” since Affirm’s stock had by then dropped 90 percent. In May, he closed a $10 million round, with another $100 million in debt financing.
By now, public and cryptocurrency markets are decidedly down, and the VC funding-fest of 2021 is over. Startup founders, meanwhile, are left dealing with the hangover. Global venture funding sank 26 percent in the second quarter of 2022, according to a report from Crunchbase. Early-stage funding fell by 18 percent, suggesting that the trouble in public markets has now trickled down to smaller startups, which tend to be more sheltered from economic calamities. The sudden change has given some founders whiplash and has left others regretting they did not not raise money sooner.
“Timing is everything,” says Emily Smith, the founder of ed-tech startup TeleTeachers, who started raising her Series A in April. “Had I decided to fundraise a few months earlier, I think I could’ve closed it up and moved on. But it’s no longer the fall of 2021.” Smith is still meeting with investors.
Smith says her startup has enough money in the bank to outlast a funding slump, but worries about the company’s valuation. Valuations in early-stage rounds dropped 16 percent in the second quarter of 2022, according to a report from Pitchbook—the first decline since the start of the pandemic. If a startup is valued too low, founders can be tempted to give up too much equity to increase their total funding, and face problems fundraising in the future.
At the same time, inflated valuations can also create problems. Last year, 340 companies reached unicorn status, with valuations over $1 billion. Some have since been dehorned by the turn in the market, and many are scrambling to cut spending or lay off employees. Some have had to settle for “down rounds,” accepting new investment at a lower valuation than before. Klarna, the buy-now, pay-later pioneer, raised $800 million from investors in June but had to lower its valuation from $46 billion to $6.7 billion—shrinking its worth by about 85 percent.
