When Investors Get Tough – Tackling “Flat” Funding Rounds  

In the first part of our series on funding rounds, I reviewed definitions for rounds that don’t come with a boost in valuation. In this post, I’ll review the business implications for these rounds, considerations as you build your PR strategy for the round, and what to expect from reporters. Ultimately, 10Fold is in the game of maximizing news assets for our technology clients, which can mean a clever articulation of the story, a pairing with another asset or “knowing when to fold ‘em” as Kenny Rodgers famously sang. 

Business Implications 

Your executive team no doubt had to kiss a lot of frogs before signing the term sheet for your current round,  and despite the effort, the term sheet reflected the same valuation as the last round. This means investors didn’t think the business’s overall market value grew from the last round. Depending on how long it’s been between rounds, this can be a bitter pill to swallow. Or it might mean that your company needs a pivot, a product expansion to build stronger product-market fit, a stronger revenue pipeline or better leadership. In any case, the investment is required to help the business move to a new stage of growth.  

In a tough economy, your team may not have the choice between waiting for better investment conditions and taking a round. Matt Cohen, founder and managing partner at Ripple Ventures, has a practical point of view on “flat” rounds that he shares on TechCrunch. Wall Street Journal also recognized this trend mid-2022.  

PR Strategy Considerations 

Just because the round does not reflect a raise in valuation does not mean you shouldn’t announce this news. Engage your PR team early – ideally eight weeks in advance of an announcement date – to help craft your messaging. Here are a few ways you can build the story:  

  • Context is critical: If economic pressure is impacting the entire industry, it’s more understood by reporters that every round will not come with a 10x valuation. Especially if you have not revealed valuation in the past, reporters won’t automatically know if this most recent round is “flat.”  
  • Valuation – to reveal or not to reveal: If you have not shared valuation up till this point, you likely do not want to do so now. The exception is if you had previously earned “unicorn” status and never made that information public. There was a time that unicorns were no longer rare, but with the funding decline and change in spending patterns, many lost their status. Making this information public is a gamble and must be done based on an agreement with your investors. 
  • Business metrics: Funding announcements are made better when you’re able to share additional metrics that show business growth – ARR, customer retention, headcount growth, new customers, etc. Consider how you can tell a story of forward momentum, even if it’s not as fast as you anticipated. 
  • Investors: Are there new investors getting involved? Why are they jumping in now? Are existing investors sticking by you? Why? Even if revenue isn’t as strong as you’d hoped, the investors see something worth backing. Tease out that story and build the narrative of why you will ultimately win in this market. 

Media Coverage  

Because most technology startups do not disclose valuation, it can be hard to tell if a “flat” round has taken place. Your biggest risk here is if you have already disclosed valuation in previous rounds, since reporters are likely to ask about that and it will be clear if you’re avoiding the question or backtracking.  

It’s not likely that a savvy reporter will “miss” what it means to announce an extension round, but that doesn’t mean they’ll rake you over the coals, either. Here are a few examples of how publications have covered “extension” rounds of funding. 

Note: These are not 10Fold clients and were chosen purely at random.  

  • PeopleFund did not disclose valuation but did describe the round as an “extension.” Investment came from new and existing investors, which signals that there is interest in the business. They also took on debt as part of this round (more on that in a later installment of this series). They explain they’re using the capital to support product development and launch a new service – signaling that there are revenue expansion opportunities to come. 
  • TechCrunch only addresses the extension element in the last paragraph of the article:  

The Seoul-based P2P lending startup, founded in 2015, successfully closed its extension. Still, the impact of the extremely tough market condition was inevitable, leading to several tech industry layoffs in the last few months. PeopleFund confirmed that it had cut about 10% of its staff in the fourth quarter of 2022 to “operate the business efficiently and effectively” amid the possibility of a worsening economy. PeopleFund had nearly 150 people as of December 2021. 

  • This time, the reporter notes that the new round comes just 14 months after the last round of funding. Typically, investors would expect a round to last 18-24 months or more to support business growth. The CEO told TechCrunch that the second round came so quickly due to technical discoveries that took place shortly after the first round.  
  • Q-CTRL disclosed bookings growth (note this is not the same as revenue but is a good alternative if ARR is not as strong), as well as the total number of active users and impressive new customers. As expected, they did not disclose valuation. 

Given the economic climate, there are dozens of extension round announcements popping up. Before committing to a course of action, take a close look at how your competitors and others in your broader industry are positioning their funding news. Chances are, they’re facing investors with similar mindsets. These rounds, while not showing huge advances in the business, can still offer an opportunity to demonstrate growth and confidence to help you in your quest to keep growing revenue. Approach these situations with eyes wide open. 

Leave a Reply

Your email address will not be published. Required fields are marked *