“It’s not you, it’s me” - Capital Markets

Why is it so G*d d@mn hard to fundraise right now?

North American private equity fundraising has hit a new low. PE funds closed $88billion in Q1 2024, down 34% from a year earlier. This is the first time since 2020 that quarterly inflows have fallen below $100b since 2020. This slow down in fundraising has continued a trend going on since 2022 and is due to tight supply conditions and scarcer capital availability.

The number of fund closings has decreased even more significantly during this period. Fund closings have hit their lowest point in 5 years. This data and report is all from Buyouts latest news this morning, with a great report for you to download here.

What does this mean for you as a founder?

When a macroeconomic pullback occurs, such as a capital market contraction, it can significantly impact the fundraising landscape, especially for early-stage founders seeking smaller rounds of capital. Here's a breakdown of how these conditions typically affect such founders:

1. Decreased Investor Confidence: Investors may become more cautious, leading to tighter capital availability. During economic downturns or market corrections, investors often prioritise liquidity and may pull back on riskier investments, including startups and early-stage ventures.
2. Stricter Investment Criteria: Investors might apply stricter criteria and due diligence processes, making it harder for early-stage companies to secure funding. The focus may shift towards startups with proven business models, clearer paths to profitability, or those in less volatile sectors.
3. Valuation Adjustments: Valuations during pullbacks can decrease as the risk appetite diminishes. Startups might find it challenging to command high valuations, affecting the amount of capital they can raise for the same equity given away.
4. Increased Focus on Unit Economics: There may be a stronger emphasis on sound unit economics over growth at all costs. Investors might prioritise sustainable growth and profitability, which can be challenging for early-stage companies that are typically in the growth-expenditure phase.
5. Shift Toward Existing Investments: Investors might focus more on supporting their existing portfolio companies to ensure they survive the downturn, potentially diverting funds away from new investments.
6. Opportunity for Differentiated Startups: While generally challenging, economic downturns can also present opportunities. Startups that offer innovative solutions for cost reduction, efficiency improvements, or address emerging needs (e.g., remote work technologies during the COVID-19 pandemic) might find willing investors despite the broader pullback.

To navigate these conditions, founders should focus on strengthening their value propositions, extending their runway through efficient capital use, and possibly adjusting their business models to align with the evolving economic landscape. I’m also meeting with and working with too many founders that still have valuation expectations based on what it was like 2+ years ago - unfortunately, times have changed, the sooner you can be ok with more reasonable valuations if raising in UK or EU the easier your funding round will be and the sooner you can focus on the work that will enable you to limit dilution or increase your equity stage at later rounds whilst focusing on creating the value that you know you can and should. Networking and building relationships with potential investors well ahead of fundraising rounds can also be crucial during these times so make sure you’re creating the space and time in your calendar to do so.

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