In the landscape of startups, securing investment remains a pivotal challenge for entrepreneurs and founders. As the competition intensifies and investor expectations evolve, understanding the nuances of fundraising has become more crucial than ever.

So what does a startup need to know when preparing for investment in the current climate?

A small market update

“We’re in a pretty tough environment at the moment for capital raising. If you look at Q2 in Europe, venture funding dropped 50% compared to Q2 last year. So that sounds pretty extreme, but if you look at Q2 this year versus 2020, we’re ahead of that time,” commented Tommy Breen, Senior Advisor at The Growth Stage.

Aaron Duke, Partnership Associate at Seedrs, commented: “I think people are making a lot more specific investments versus 2021, where a lot of investors were throwing investments at everything.”

“Interestingly enough, we’re actually seeing a lot more founders raising than even before 2021. So even though things might seem very bleak, I think the system has grown at a pace that outpaces the market,” said João Nunes, VC Analyst at Playfair Capital.

How can a startup determine exactly how much funding it will need?

Funding amounts differ from startup to startup, but one of the hardest parts before a funding round is for a startup to decide how much money they are aiming for in the round. Too much, they may face issues hitting the target, too little and they may run out of money too quickly.

“Before this tough environment, we were seeing companies ask for 12 to 14 months runway and 14, but now we’re seeing companies ask for anything up to 24 months runway,” commented Nunes.

Breen added: “You’ve got to do your cost forecast and figure out what you're going to need, and then look at an 18-month runway, and then whatever figure that comes to, add on 10% gross for unforeseen events. The way things have turned, investors definitely want companies to have a clear idea of a pathway to profitability or breakeven. So, make sure you're building within your costs.”

What are the different funding options available to startups?

An alternative to the most popular funding option is crowdfunding.

“Crowdfunding isn’t for everyone, you should utilise it in a specific way. 
Crowdfunding really needs to be on the founders raising roadmap. You are getting millions of eyes on your raise within our platform and founders should use that to their benefit,” commented Duke.

Daisy Rowland, Investment Specialist at Innovate UK added: “We at Innovate UK are best known for grant funding. So that is an option, especially at that early stage. The programme that I work on brings together grant funding and private equity. So to get the grant funding, you have to get at least the same amount in private equity. So you can be funded for your project, and then you can get extra capital to do other things with your business to help you grow and scale.”

Why isn’t Venture Capital funding appropriate for every startup?

While a popular source of investment for startups, VC funding isn't suitable for every business due to several reasons. Firstly, VC investors typically seek high-growth companies with a scalable business model and the potential for a significant return on investment, often through an exit strategy like an acquisition or an initial public offering (IPO). This focus on rapid growth and high returns can misalign with the objectives of startups prioritising steady, sustainable growth or those in niche markets with limited scalability. Additionally, accepting VC funding often means surrendering a degree of control and ownership to the investors, which might not align with the founder's vision or business strategy. Finally, the pressure for rapid growth can force startups to prioritise short-term gains over long-term stability and innovation, potentially jeopardising their foundational values and operational integrity.