What Every Founder Should Be Doing In This Turbulent Market

It’s no longer news that the market has been experiencing a downturn for the past few weeks. Investors across the globe have been urging founders to prepare for the worst and TechCrunch quoted YCombinator advising its startups to raise additional capital if they can to ensure they have a runway of about two years as we experience this sharp reversal in tech stocks after what was a 13-year bull run.

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The Pariti Founder fellows recently had a session with Henri Pierre-Jacques (Managing Partner, Harlem Capital) and Lexi Novitske (General Partner, Norrsken22) to get valuable insights on the best course of action for founders in a turbulent market, and because we are not gatekeepers, we are choosing to share these insights with you as well.

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There are some key things that happen in a turbulent market: rounds take longer, rounds get smaller, valuations will come down, there will be more scrutiny on the diligence process, and the bar is higher in general. So, how do you survive this as a founder? Moreso, how do you survive this as an African founder?

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Here are 4 important things you need to do right now:

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1. Cut costs and prepare to bootstrap: In the current climate, the first thing you need to do is evaluate areas where you can cut down costs. That could look like a hiring freeze or pressing pause on projects that aren’t essential to your survival. 

2. Forecast that you might not be able to raise for the next 18 months: While raising funds is not impossible right now (just more difficult, we’ll get to that), it would also be wise to ensure you have enough runway for 18 months which is the length of time experts are predicting the current state of the market will last for.

3. Don’t be super sensitive on valuation:  Under what was “normal” circumstances in the past 2 years, VCs didn’t have a higher percentage of the power in the negotiations, the founders did, but in a down market, we see a lot of that power shift to the VCs and this means they are able to negotiate more on their terms. We have seen valuations go down 30% - 40% in recent times, so right now, don’t hold on too tightly to what you believe you should be valued at because the market also plays a part in determining what that looks like.

4. Overall, adapt:  This market is bringing some changes to how we do business and how we raise funds. Fundamentally, be ready to adapt to the situation to ensure you stay afloat until it passes.

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The market right now really proves that cash is king and while raising funds won’t be as easy as it was last year, it’s not impossible, you’ll just need to do a lot more. 

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If you are looking to raise funds right now, keep in mind that while VCs can’t control the market, they will assess it. They won’t stop operating altogether because of the different factors affecting the market, but they will be more cautious and stricter when it comes to due diligence. You’ll need to be able to wow investors in a bad market to close a deal because they don’t feel that urgency. 

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To increase your chances of closing, do your research and figure out what the core markets of the investor you are pitching to are. Go to an investor that has 3 - 5 companies in your space and it’s very clear that they have a thesis on the vertical that you’re working on. You also need to be able to prove why you are the best person to solve that particular problem at that particular time. 

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One final tip would be to really focus on your local markets rather than the international ones, those are the investors who will not turn their backs on Africa in difficult times.

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If we were to find a silver lining in the current state of things, it would be that we are going back to conviction driven consensus in funding. As a founder, you will get to see who really believes in the business and who really wants to work with you.

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Also, there’s a saying that tough markets make for resilient businesses and weeds out the posers. This pruning could create a better and stronger ecosystem.

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At Pariti, to give quality African founders, solving critical problems in Africa an opportunity to raise funds even in this turbulent market, we’ll be hosting our maiden edition of our Demo Day on the 14th of June 2022 where top tier investors who are passionate about the African startup ecosystem will be present. To get an invite to attend, click here to RSVP.

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