Fundraising in this new normal, part II: Navigating the return to historical norms with fundraising

This is cross-posted from the original article published on Forbes.

As we revert back to the mean from an unprecedented fundraising environment and recover from the whiplash of going from frothy markets with inflated multiples to frozen IPOs and increased rates, there’s a lot to consider in the world of fundraising.

The first step is realizing that the post-pandemic fundraising environment that inflated returns and involved little to no due diligence isn’t coming back. This 'new normal' is a regression back to what fundraising has been for years—a return to the basics of raising venture capital. So, what does it take to re-adapt?

Read the trends and know when to capitalize on luck.

This return to normalcy affected everyone in the market, including my company, Percent. We attempted to raise our Series B in March 2022 when we quickly realized the market was turning in front of our eyes. It took just a few meetings to recognize that this was not changing anytime soon and we shut down our process to let the dust settle before getting back out into the scene.

In the summer of 2022, we tried again and managed to get a term sheet at the end of August. Waiting worked, but the market was still very tight, especially for new investors who had no previous exposure to us. In turn, we shifted our focus to just investors who had followed our story and mission for years. They were able to be less valuation-sensitive because they were familiar with our vision and how we had worked to execute against it.

When the market continued to stay soft, we found that family offices were still deploying capital as they were less valuation-sensitive. We quickly shifted our strategy and went after these types of investors instead to fill out more of the round. Still, even with all this, we were several million short of where we needed to be to close.

The last piece of the puzzle fell into place with a little bit of luck. The mini-banking crisis in early 2023 that led to the demise of SVB shone a whole new light on private credit. Throughout that weekend, more VCs began to realize the value of our business. The interest in our round skyrocketed to the point where we ended up being oversubscribed. Although luck should never be a replacement for a robust strategy, it's crucial to recognize that the two can be a powerful combination. When the opportunity presents itself, be sure to take it.

Trust those who do the proper due diligence.

The investors you should trust the most and want on your cap table are the ones who put in the work to understand what you do. It may seem like overkill at the time when certain investors ask you question after question and request new cuts of data while running you through the wringer with reference checks. It is these investors that you should want the most as they understand the ins and outs of your business and likely will be most helpful to you.

Putting in the work to understand what your business does and how you work shows these investors care, which can be helpful in a business sense and a personal sense—at the very least, they’ll stand by you when things get tough.

Before this reversion back to the mean, capital flowed freely, so it wasn't uncommon for investors to do little to no diligence. Easy money may be enticing when you’re looking to fill a round, but the reality is often that on good days, these types of investors may not be much help. On bad days, when you especially need guidance, support and advice, they likely have little to no understanding of your company and cannot help in critical times.

Do the little things right.

A little goes a long way when fundraising. Efforts like sending investor updates each month to investors on your cap table show a level of discipline, helping them stay on top of your progress. In doing so, they will be more likely to step up if you need to lean on them again when you go back out for your next round.

Creating detailed monthly decks for your board instills a level of rigor around reporting that also helps ensure they are informed on all the key metrics that drive your business. A good board can make or break a company and heavily influences the trajectory of its success (or lack thereof).

Remember to also send company updates to prospective investors—everyone you ever spoke with for a round. These should include the most exciting updates every two to three months. This helps them stay on top of your progress and keeps you top of mind as they think about whether you are at the right stage for them to invest or if there’s anyone they can introduce you to.

Finally, never raise at a valuation you don’t think you can live up to. It can be easy to look at the past few years and be tricked by the frothiness that defied all logic, but it's difficult if not impossible for these valuations to sustain themselves. What goes up has to come down.

Trust your gut and don’t overshoot. If you truly think your metrics are being overvalued, avoid getting sucked into the hype and stick to what’s best for the company long term. Your investors, your team and you will thank you in time.

Level-set your expectations.

Fundraising, while time-consuming, is a necessary part of building a venture-backed company with staying power. This return to the mean might mean fundraising has gotten a bit more difficult, but I see it as a good thing overall. Lengthy, diligent fundraising processes instill a level of discipline in both founders and investors that leads to healthier and more sustainable companies.

If you go into the process with the right methodology and the right expectations, you won’t be disappointed. If anything, you will come out of it a better founder and operator as a result.