Convertible note fundraising, fintech’s falloff, how to mark-to-market – Nob6

Everyone loves an underdog, which is why investors and tech journalists are so fond of discussing startups that launched during the Great Recession of 2008, like Airbnb, Uber, WhatsApp, Mailchimp, Square and Venmo.

It’s possible that your pre-seed, pre-revenue startup could similarly defy gravity, but in July 2022, it’s going to be difficult to find many investors who want to bet on a company with no traction.

If your company is too nascent to be valued, convertible notes might be a viable way to secure early financing. Basically short-term debt that converts into equity, these notes can be a boon for companies nearing their tipping point.

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Julie Gionfriddo, director of advisory services at Fiondella, Milone & LaSaracina LLP, wrote an overview for TC+ that weighs the benefits and drawbacks of fundraising with convertible notes, along with some strategies for getting started.

Raising early money this way provides some obvious benefits: For example, “they typically don’t come with any control or board seats.”

However, notes can also create risk, like setting valuation caps too low, failing to raise enough capital or other poor planning that can hand investors more equity than you intended.

Bottom line: If your company is on the cusp of an opportunity, convertible note financing could be a way forward, but only if you have a realistic valuation and a plan to reach it.

Thanks very much for reading TC+ this week!

Walter Thompson
Editorial Manager, Nob6+
@yourprotagonist

Once a key driver of global venture activity, fintech investment slows around the world

Compared to Q1 2022, fintech funding dropped 33% in the last quarter to $20.4 billion across 1,225 deals, according to CB Insights and PitchBook. Year over year, fintech startups received 46% less funding than in Q2 2021, yet the sector still received almost 20% of all VC dollars.

Seeking insight into the slowdown, Mary Ann Azevedo, Natasha Mascarenhas and Alex Wilhelm looked at U.S. and global activity: What’s ahead for layoffs, marketing spending and consolidation?

“It is not a huge surprise that fintech had a big part to play in the venture boom that is now behind us,” they write. “What’s really going on out there?”

Record VC fundraising isn’t necessarily good news for first-time fund managers

In the first six months of 2021, PitchBook reported that U.S.-based venture capital firms raised $74.1 billion. That amount rose to $121.5 billion in H1 2022, but as more investors wait on the sidelines, where is that money going?

Reporter Rebecca Szkutak looked into the numbers and found that megafunds are responsible for most of the increase. “Nearly two-thirds of venture capital was raised by just 30 funds,” she found, a potential sign that VCs are shoring up their reserves “ahead of a longer downturn.”

Mark-to-market to arrive at a realistic valuation and improve your fundraising odds

If your startup has less than 12 months of runway, here’s more worrisome news: Before you can raise additional money, you may need to bring down your valuation.

Ascento Capital founder Ben Boissevain shared a mark-to-market overview with TC+ that can help founders reset their expectations as they approach their next round, or potentially, an acquisition.

“Valuations are ultimately determined by supply and demand in the M&A market,” he writes.

“The higher you expect your startup’s valuation to be, the lower the probability of the deal going through.”

As fundraising gets harder, founders should ask investors for a flat round

There are worse things a founder can do than accept a lower valuation: For example, laying off every employee before selling your used office furniture on Craigslist. That would be worse.

Investors understand that entrepreneurs are buffeted by macroeconomic events, but just like cash, their patience and empathy are finite resources. That’s why Matt Cohen, founder and managing partner of Ripple Ventures, says founders should start asking now for flat or down funding rounds.

“Instead of delaying this conversation, I highly encourage startups in this situation to approach their investors now and secure their Series A2 round to shore up their balance sheets,” says Cohen.

“It’s better to go to the well once and get what you need to see this volatility through.”

You may need more than one pitch deck

A presentation deck is suitable for a live or in-person pitch, but founders won’t always have a chance to be in the room where it happened, as the song goes.

With that in mind, Haje Jan Kamps shared his personal best practices for creating decks that can be used to leverage several opportunities:

• The teaser deck.
• The send-ahead deck.
• The presentation deck.
• The leave-behind deck.