Raising Startup Funding Used to Be Easy—Not Anymore

When he was raising his first round of funding, his email inbox was filled with interest from investors. He wanted to apply the fast-rising concept of buy-now, pay-later to health care bills. He kept in touch with a few investors who may chip in more as the company grew.

After public markets took a nosedive in February, investors were less warm. Unit economics, sales efficiency, and a path to profitability were all asked of him by the VCs. When the company was more mature, the questions were expected to come later. After walking investors through the startup's mission and goals, he asked them if they were interested in the financial side of the business. The stock price of Affirm had dropped 90 percent by that time. He closed a $10 million round in May of this year.

The public and cryptocurrencies markets are not doing well. The startup founders are left with a bad taste in their mouth. According to a report, global venture funding fell in the second quarter. The 18 percent fall in early-stage funding suggests that the trouble in public markets has trickled down to smaller startup companies. The sudden change has given some people whiplash and others regret not raising more money sooner.

Emily Smith, the founder of ed-tech startup TeleTeachers, says timing is everything. I think I could have closed it up and moved on if I had decided to raise money earlier. It isn't the fall of 2021. Smith is still talking to people.

Smith says her startup has enough money in the bank to last, but she is worried about the company's valuation. According to a report from Pitchbook, valuations in early-stage rounds fell in the second quarter of 2022. If a startup is valued too low, they can be tempted to give up equity in order to raise more money.

Problems can also be created by inflating valuations. The number of companies with valuations over a billion dollars went up last year. Many are trying to cut spending or lay off employees because of the turn in the market. Some have had to accept new investments at a lower valuation than before. The pioneer of buy-now pay-later raised $800 million from investors in June but had to lower its valuation from $46 billion to $6 billion because of the economic downturn.