Fundraising in a bear market

Calin Drimbau

Aug 4, 2022

This post is part of our 'Entrepreneurial toolkit' series. In this series, we put together a curated list of resources on a topic that is top of mind for entrepreneurs.

We'll share some key insights from the selected clips, but we highly encourage you to listen to the clips on broadn so that you can hear the experts themselves sharing ideas, opinions, and advice.

What’s happening in the markets now?

Post-Covid spurred the availability of cheap capital in the markets due to central banks lowering interest rates to mitigate the impact of the pandemic. This made startup investments commonplace. According to an EY report, venture-backed startup investments exceeded $307 billion in 2021, more than doubling the previous year's record. The size of rounds has grown and the valuations have skyrocketed due to this frenzy. Startups are unconcerned about raising capital at higher valuations because their competitors have access to the same capital. If they don't raise funds now, someone else will gain an edge in terms of talent, resources, and growth.

The impact of raising capital at high valuations

Since capital was being made available for pennies on the dollar, did it make sense to raise ludicrous valuations? One argument against raising so much so early is, startups that have barely been able to release a prototype cannot justify their valuations as they have no money coming in. On the plus side, dilution and cheap capital are reasons to raise capital; if companies can pump up their balance sheets while keeping the majority of the company, it does seem like a fair deal.

The other is the Employee Stock Ownership Plan or ESOPs. These can be helpful or detrimental depending on how resilient the startup is. Stock options are tied to company valuations, and if one raises a large round, one can attract top talent by offering them stock options. However, if the company's valuation falls, there may be an exodus of talent from the company.

Why are late-stage funds on the edge?

In this market, late-stage investors are hanging by a thread. This follows the disappointing public offerings of technology companies post-2018. When investors write a cheque for a late-stage investment, they expect at least a threefold return. Late-stage cheques are often large, and squeezing out the last ounce of return can be difficult. 

In addition to that, the performance of funds such as Tiger Global has not been encouraging. Tiger Global had $23 billion in assets under management at the end of 2021 and was down 52% from the previous year. This is the largest loss ever recorded by a hedge fund. However, Tiger Global operates differently as a hedge fund, with greater flexibility to exit a bad investment than the venture world. 

On the brighter side, last year, venture capital funds raised approximately $330 billion in committed capital to be deployed over the next 2-3 years. This locks up the amount of money available to startups. An important distinction between venture and hedge funds is when a venture capital firm makes a commitment, it is locked in for the duration, unlike hedge funds, which may demand money back or sell stock in a company. This is a positive sign for VCs and startups, but the supply will be directed towards quality and growth.

Lessons from previous downturns

During the 2008 financial crisis, interest rates were whittled down to help the battered economy. This meant that low-cost capital was readily available. It's also worth noting that, even during the meltdown, innovation was taking place, for instance, Apple released the first iPhone in 2007. Companies that emerged from this storm had everything they needed to succeed: a thriving technology sector and cheap capital. 

Just after, there was an increase in startup innovation and funding, and the world witnessed the birth of unicorns such as Airbnb and Uber. Today, interest rates are rising and procuring capital is becoming harder. At the same time, innovations in key areas are keeping the scales balanced, with money pouring into domains like Web3, Crypto, AI/ML etc. and companies with a green bottom line in general.

Warning signs in the venture market today

Today's markets are fraught with complications. The fact that one-third of public biotech stock in 

the United States trades at a discount to cash is concerning in and of itself. Furthermore, 40% have less than 20 months of cash on hand. This is especially concerning given that biotech is a capital-intensive industry due to the money needed for R&D processes and clinical trials.

This has the venture capital industry on edge. The dry powder has increased year on year, with $230 billion available alone in 2021. This is despite a record amount of money being raised in the same year.

This could result in a disproportionate allocation of capital among startups, with those receiving investments receiving a large portion of it. It also indicates that funds will prioritize quality over quantity and invest in businesses with stable revenues and a clear path towards profitability.

What metrics are being used to justify today's valuations?

Investors have become more rigorous in their approach because of these warning signals. Going back to the 2008 financial crisis, many venture funds returned capital to their investors. The reason for tearing up those commitments was simply that their investments were unjustifiable and their portfolios had capsized. 

Now, the water is rising, and there are indicators that can help determine where startups stand in this market. This brings us back to the issue of money supply and allocation. Venture capitalists have deployed capital far too quickly, necessitating a detox and restoration. The focus has turned towards healthy companies with a proven track record of generating output. 

Just to put things into perspective, Matt Turck's tweet outlines what metrics and numbers will justify a cloud unicorn valuation today. 

Paying attention to the ‘Burn Multiple’

David Sachs, former COO of PayPal and co-founder of Craft Ventures, uses the ‘Burn Multiple' to assess a startup's ability to weather turbulent times.

As he mentions, the burn multiple is the amount of money spent for every dollar of incremental recurring revenue generated by a company. If a company spends less than or equal to a dollar (1x) to generate an additional dollar in ARR, they are doing amazing, and if the burn is between 1-2x, they are still doing quite well. In other words, if a company spends $20 million to generate $10 million in ARR, it is still considered good. 

Investors, directors, and founders can use the burn multiple as a metric to plan how fast they want to grow in the next year or quarter by setting a target and not exceeding it by a certain limit.

Funding outlook for Digital Asset startups

Digital assets are another intriguing area that has received a lot of attention lately. With new technologies emerging at such a rapid pace, there is no telling where things will end. One thing is certain: venture money has poured into digital assets in recent years, and with the dry powder in hand, more could be on the way.

Many investors fled after losing money in the five years following the 2017-18 crypto downturn. However, active participation by titans like Goldman Sachs and J.P. Morgan has caused the mood to shift dramatically. The focus has shifted to businesses and infrastructure. Investors are eager to invest in startups that provide solutions to these big players – institutions, corporations, banks, and governments – because the money is there and it isn't going away, as consumer interest in digital assets and innovation has proven to be here to stay.

Why should funds raise and invest capital during a downturn?

Nothing is impossible, including raising capital during a bear market. At the end of the day, the adage "higher the risk, higher the return" still holds true, with one caveat: not every risk generates a return; it is the calculated, precise risk that becomes a multi-bagger in the long run. There is also an assertion that now is the best time to invest in funds and companies because valuations have come down, companies are preparing for the storm, and there may be real opportunities for the next two or three decades that are just being born in this market, similar to Amazon in 2001. Many industries are poised to be disrupted by technology, not to mention the opportunities in emerging markets and developing economies.


In this tight environment for fundraising, there is a lot of emphasis on private companies' efficiency and their ability to manage cash flows without running out of capital and not raising at absurdly high valuations. There is money ready to be deployed in the market; the question is whether it is being allocated productively to worthwhile startups. With precise calculations, funds will be able to make money and startups will be able to weather the storm and emerge successful. In the midst of chaos, there is an opportunity for the next big thing. Especially now, with all the variables in the equation like technology, capital and lessons from the past, there’s a future waiting to be built upon.