Merry Crisis: Fundraising in times of trouble

The news doesn’t look promising for startups interested in recession fundraising, with all the talk about valuation cuts, down rounds, and diminishing startup revenues. Yet that’s how everything looked in 2008 when we have witnessed the rise of several successful companies. Asana, Slack, Uber and many more flourished in the last recession, while Netflix used that time to reinvent itself completely.

For every successful company, however, there are dozens of those whose names do not ring a bell because they just did not make it. What separates you from them is that you now have solid historical data depicting the investment landscape in a recession.

With that in mind we sat down to discuss recession fundraising with Jan Habermann (Partner at Credo Ventures), Jure Mikuž (Managing Partner at South Central Ventures), and Krisztián Gyepes (Investment Manager at Elevator Ventures).v

The first thing you need to know is that the VC funds have been aware of and preparing for the impending crisis for some time now, as Jan assured us. This means they have done their fundraising work so their funds can keep investing during the upcoming rocky period.

As for startups looking for investment, both our investors and the 2008 data agree – some money will be easier to come by. And by that, we mean early-stage funding. Looking at the 2008 data provided by Crunchbase, Series A and all subsequent series were almost cut in half during the last financial crisis (series A, B, and C dipped 40%, 42% & 47%, respectively).

Early-stage investments, however, went the other way – they grew steadily. There is a good explanation for this – early-stage funding is cheaper, covers more companies, diversifies investments in a turbulent period, and there is no shortage of new businesses. While recession hits existing businesses hard, often causing layoffs, this results in more new businesses as people try to create their own opportunities. And as some old companies go out of business, new, more agile ones rise to take a piece of the cake.

So, if you are looking for early-stage investment, your chances (at recession fundraising, at least) look as good as ever. However, those looking for later-stage investments will have to get more creative.

While there is a lot of talk about VCs tightening their belts, corporate venture capital (CVC) is ready to shine, according to PWC, “The Golden age of CVC is yet to come.”

This may come as a surprise, since the last time recession hit, CVC was the first to throw in the towel. In 2008, most corporations’ first cuts were in R&D and investments. That might not have been the best choice, seeing how it lost them the trust of the startup community that took a long time to rebuild.

But as PWC theorizes, corporations that want to stay in the VC game do not have that luxury anymore. Bailing again would lose them the trust they spent time and resources to build. Competitive pressure to innovate is also a life force, keeping CVC alive and kicking, and it is not going away anytime soon.

Krisztian notes that this theory was proven in the nick of the COVID-19 crisis, when corporations did not pull the plug on digitalization and innovation, but upped their investments:

While we can safely say that all industries took a hit in the last downturn of the economy, it is also safe to say that not all of them have been hit as hard. All stakeholders in the startup ecosystem agree that some verticals will again fare better than others.

The only trouble is that no one can agree on what those verticals are.

Some believe that the more “traditional” verticals like finance or healthcare will power through as they have been around since the dawn of time. Krisztian, of course, is one of them (expected coming from a CVC investor in the financial industry), but he also mentioned health and cyber security as likely candidates.

Others put their money (often quite literally) on emerging technologies like Web 3.0 or the metaverse, predicting a steep upward trajectory.

Jan and Jure have a slightly different viewpoint. Both Credo and South Central Ventures are generalist funds and will continue to invest that way. According to them, well-prepared startups, who put in the work, can always find, and justify investments.

Jure’s advice to founders looking to raise was to start working on their strategy ASAP and plan to close as soon as possible. If times ahead are unpredictable, it is better to close sooner than wait for better days – a golden rule in recession fundraising. This especially applies to later-stage startups, as historical evidence shows that later-stage investments are harder to come by.

Those not investment-ready should continue working with their teams on building and upgrading their product. As all our investors agreed, a competitive product and team that put in an effort are investable even in the worst of times.

So let us end this on a high note with a thought from Jan:

What are you betting on?