How startups can raise money in emerging markets today
Timeless Principles
With international “tourist” investors having retreated to their home markets and a limited supply of domestic venture capital, it can feel like a funding winter has come at every stage in emerging markets. Macro and political instability are only compounding this challenge for founders speaking to reticent investors. In this environment, founders need to be more strategic, methodical and dedicated in their fundraising strategy to maximise the probability of closing a new round. Some points that we at Sturgeon believe are fundamental to doing this:
1) understand that fundraising is a process that requires time and budget allocated to it. Before approaching any investors, founders must decide who within the founding team (and it has to be founders who pitch investors) will be taking the lead and how the rest of the team will manage operations accordingly. Given that fundraising is almost a full-time commitment, you have to balance without compromising on operations & growth while raising. The better you prepare for fundraising, the more likely you are to raise capital and the shorter time it will take.
2) make sure to do your due diligence on an investor before you approach them. Understand whether you have the right business model, are at the right stage, and operate in the right geography to meet their mandate. We get half a dozen pitches per week from startups that are so far out of our mandate it isn't worth a conversation.
3) clearly articulate the opportunity set that you are targeting and why you and your team are the right people to tackle it. While it might seem obvious to you, as an investor meeting you for the first time, there is almost complete information asymmetry and you must bridge that gap as quickly and efficiently as possible. If you have done your due diligence on the investor, this should help at this stage with conveying why they should want to invest in you.
4) demonstrate a path to breakeven/profitability with this round. “Unit economics” and “profitability” have replaced “growth” as the key concerns for VCs globally. Startups in emerging markets have historically been more conscious of this as capital has typically been scarce. However, its importance has increased. If you can demonstrate to investors that this is the last round you will have to raise until you reach profitability, it significantly reduces funding risk and increases the probability of investment. The power to raise opportunistically in the future when the timing is right reduces dilution risk for investors today, another important factor in return calculations. If you are already breakeven/profitable – well done, and maybe now isn’t the best time to be raising unless you can get the right investors at the right price onboard.
5) look for warm introductions to VCs. Cold outreach, as you will know from your own marketing/sales, has a low conversion rate. This is especially true for VCs, who receive a lot of pitches and are more likely to follow up with you if you are referred by someone they know/trust. This could be another VC, or a founder in their portfolio/network. Keep track of investors interested in your geography or vertical & ask investors you meet with “is there anyone else you think I should reach out to?”
6) maximise ROI from events by planning beforehand. Whether startup/VC events are productive depends on who you ask. However, you can increase their utility by putting in the work beforehand to properly prepare. This means going through the list of VCs attending and reaching out to them through LinkedIn/email/warm intro so they are already aware of who you are and what you are doing. Ideally, you can arrange a time to meet, or at least you can approach them from a stronger position of context and put a face to a name.
7) investors, especially VCs, are unlikely to write you a check after the first meeting. Sturgeon passed on 80-90% of our portfolio companies the first time we met them for a wide variety of reasons that could have been startup-specific or something beyond their control. If you’ve had the chance to meet with a VC, be sure to send them regular monthly updates (bullet point highlights, lowlights, short-term plans, and table of KPIs) so that you stay fresh in their mind and maximise the opportunity to raise from them in the future.
8) be clear on your metrics and KPIs. As a digital business you have a wealth of data available to you, far more than traditional offline businesses, and this is a key competitive advantages. Whether you can count your customers/users on one hand or you have several (tens or hundreds of) thousands, you need to know the key metrics and KPIs for your business inside out when speaking to investors. While it is your idea that gets you into the room with investors, it is the underlying data that will convert them into investing in your company.
9) have clarity on the resources required to build your business over the long term. You should understand that capital efficiency doesn’t mean underrepresenting what is needed to build out a significant business. Instead, a thorough representation of what is needed provides investors with clarity and develops conviction in the founder's ability to accurately forecast and manage resource expenditure.
10) articulate your long-term moat. Being specific also extends to being conscious of what makes your business so much better than the competition, both startups and incumbents. Many founders do not impress upon investors what their moat is and why they are solving a problem that will sustain and grow into the future. Investors like to invest in permanence and that is even more apparent in a funding crunch. Whether your business model is tried and tested or novel, it should make sense over the long-term from a first principles approach.
11) stay true to what you believe in. Investors bring a wealth of experience from the other startups they have invested in, and their advice can be invaluable. However, it is your startup, and it is you who understands the problem better than anyone. Make sure you keep this front and centre as you are building, and don’t let yourself be led down different paths just to satisfy your investors.
Despite the challenges, we believe that now is as good a time as any to be building transformative solutions, with both consumers and businesses facing multiple pressures that can be solved through technology. High-quality startups with strong teams, positive unit economics (or a pathway to reaching them), a long runway of growth, and a data-driven approach to building their business will be able to raise. Sturgeon Capital is actively investing in Central Asia, the Caucasus, Bangladesh and Pakistan and will continue to back founders building category-defining businesses in these difficult times.