What Do 2018's Funding Trends Mean For Entrepreneurs Trying to Raise Capital in 2019?
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“Your ability to raise funding depends on your team, your product, and the size of the market.” Every entrepreneur has heard this line at a VC conference at some point in his or her life. However, what these conferences typically do not discuss is the elusive fourth factor in raising funds – market sentiment.
Have you noticed that companies in the same sector tend to get funded together? I.e. if company X raises a round of funding from investor A, typically their competitor company Y will soon be funded by investor B, and company Z will be funded by investor C, and so on. This is because every year, there are industries and topics that are “trending” – whether it is marketplaces, or hyper-local, or AI or fintech – investor interest comes and goes in waves. This means that sometimes companies with a wonderful team, a fantastic product, and a great market can’t even get a meeting, while other companies with a good team, an average product, and an unproven market can raise millions of dollars. Moreover, depending on the number of sectors that are “hot,” the general investment climate can improve too, and you see more companies, in general, getting funded in certain years vs. others, or getting better valuations in certain years vs. others too.
Hence, as an entrepreneur, it is really important to be aware of the current sentiment to better prepare for raising funds. Here is what you should be aware of going into 2019:
It’s Raining Money in Fintech
Overall, start-up funding in India grew 108per cent, from $2 billion in 2017 to $4.2 billion in 2018, however, funding was concentrated in certain sectors- specifically fintech, enterprise software, healthcare, AI, and edtech.
Why this is important: If your company is in one of these sectors, now is a good time to be having funding conversations with investors, as if there are too many incumbents in the space who have gobbled up market share by the time you are ready to raise, it may be harder to get the job done. If you are not in one of these sectors, you may want to think about what aspects of these sectors investors find exciting (for example, a large and disorganized market or the ability to improve transparency) and discuss how some of these aspects are relevant to your own company.
Though Funding As A Whole Increased, Seed Stage Funding Decreased
Though late-stage funding grew 259per cent from $847 million to $3 billion this year, Seed Stage funding fell 21per cent to $151 million this year, with fewer deals happening too.
Why this is Important: This fall in seed stage funding could be the result of a couple of factors. First, that investors are investing more money to support companies they have already invested in during those companies’ later stage deals, or are chasing “big-money” deals where they can get a quick exit. Hence, they are spending less time betting on and nurturing the early-stage companies. Second, that the bar is higher for seed-stage start-ups to get funding than it was in the past – investors could be looking for higher traction, more revenue, or better margins that they previously did. Though seed-stage start-ups can pray for the winds to turn, what would be a better use of time is ensuring they are creating a differentiated product/service with value, that people will pay real money for.
More Women Founders Got Funded, But They Received The Smallest Piece of the Pie
Though 15per cent of funding deals between Jan-Sept 2018 had a woman founder or co-founder, they captured only 5.2per cent of funding in value terms. Moreover, women solo founders accounted for just 20 of the 102 deals between Jan-Sept 2018. The silver lining? There was an increase in Series B, C, and D rounds lead by women, implying that the few companies that did receive backing, are in fact scaling.
Why This is Important: As a woman, know that raising funding is (most likely) going to be harder for you. In addition to doing research, and preparing your deck and model, be ready to answer less relevant questions like when you will start a family, or when you will get married. You may choose to answer or not answer these questions, but either way, you should be prepared for it.
At the end of the day, the quote I started with was right - your ability to raise funding DOES depend on your team, your product, and the size of the market. However, being aware of investor sentiment and preparing your expectations accordingly, doesn’t hurt either.