In June 2022, we hosted ‘Fundraising in A Market Downturn’ where a panel of experts shared their predictions of what founders could expect when market conditions would — inevitably — change. Six months on, we sat down with Fran Spooner — Partner at Marriott Harrison, valued partner of Sie Ventures — to discuss what founders should be prepared for as they go out to fundraise today.
Based in London, Marriott Harrison is a legal transaction and advisory firm that works with ambitious entrepreneurs and insightful investors to build, evolve and monetise globally successful companies. It has a unique understanding of venture capital, and the end-to-end perspective needed for a journey built around venture capital investment and growth, from the perspective of entrepreneurs, investors, fast-growth companies, their management teams, shareholders and stakeholders. The firm is consistently ranked by the legal industry directories, Chambers and Legal 500, with Fran recognised by Legal 500 as a Next Generation Partner (one to watch!).
Can you tell us about yourself?
I’m Fran Spooner, a corporate transaction specialist with expertise in venture capital, corporate technology and private M&A, and Partner at Marriott Harrison. During the 10+ years I’ve been at the firm, I’ve worked on lots of different types of transactions for companies in a wide variety of sectors. Whilst I still do a good mix of corporate work, my focus is now on venture capital transactions, working predominantly for tech companies and tech-focussed investors on investments from pre-seed to Series A and beyond.
I’m particularly passionate about working with and supporting female-founders, and female-focused investment, which is why I’m delighted to partner with Sie Ventures on its cohort programme and wider community initiatives.
Have you seen any emerging trends when it comes to fundraising?
As usual, MH has had a busy 12 months but we have seen a slight slowdown (or change) in deal activity. On the VC side, we have seen that more capital is being directed at larger rounds and deals. VCs are also being slightly more cautious when it comes to valuing investments, which means that deals are taking longer to close (more due diligence and/or negotiation over terms, for tighter protection), and there have been more down-rounds. But we’ve also seen some cases of bridge financing rounds that emerge and close quickly, in order to get capital into portfolio companies.
More and more companies seem to be raising via convertibles (e.g. ASAs / SAFEs and convertible loan notes), essentially kicking the valuation question down the road but getting funds into the company to keep it going through a hard economic climate. As a result, we’ve seen more institutional investors (rather than individual angels) investing via these instruments and asking for slightly tougher terms (e.g. pro-rata rights and board seats), extending the negotiation and time involved in these previously quick and efficient funding instruments for very early-stage companies.
Whilst not linked specifically to fundraising, we’ve seen a slight increase in deal activity for smaller M&A transactions, which might be a symptom of the general economic climate — companies consolidating to grow and getting relatively good deals in the market.
We’re glad you raised the economic climate. What kind of challenges do you anticipate for the industry overall as a consequence of the current economy?
For the economy as a whole, recession, rising inflation and rising interest rates have meant significant decreases in consumer spending, which, in turn, means that consumer companies — particularly B2C Fintech — are going to be affected. Very early-stage companies are struggling to get started, too, with less money from “friends and family” as everyone tightens budgets and cuts investment spending. Investors are becoming more risk aware and are also similarly hesitant about investing.
This is particularly true for female founders, who might be more vulnerable to the changing economic climate. For instance, take a male-dominated VC investing in Femtech. To them, the Femtech company’s business ideas might be seen as less “typical” and therefore riskier.
What do you think will either make or break the deals for those raising capital this year?
Investors will be deterred by poorly crafted pitch material. If you aren’t sure what you’re doing, then seek advice — first impressions last. Discrepancies between founders’ and investors’ valuations might be another barrier to raising capital. In other words, what you think the company is worth might differ from what investors think. Lastly, with VC’s being more risk-aware, founders should expect them to request a more detailed, structured understanding of the company’s prospective market.
Then how should founders respond to this climate, these challenges? What should they consider when fundraising and pitching to investors?
- Preparation and organisation. Since it is more competitive, everything should be clearer, more organised, and more definitive — don’t give an investor a reason to lower the valuation or pull out of the investment. Organise your information and create a data room with all your contracts, employment terms, share cap table, option docs, etc. It’ll save you time in the long-run and look impressive to investors. And do all of this early — it’ll only add to the stress and pressure of fundraising if you’re scrabbling around looking for information, or trying to find answers to questions, when reaching a funding deadline for your business.
- Set realistic expectations. You have not closed the deal when you receive confirmation from investors that they want to invest — you need to negotiate and agree term sheets and only once those are signed do you start negotiating the terms of the deal, which will then go into the legal documents. A fundraise may complete within 4–6 weeks of signing term sheets, but it can (and is likely to in this economic climate) take longer than that. If you need funding by a particular date, factor the deal timetable into your own timetable.
- Make sure you have the necessary information. For one, be ready to present strong financial evidence. This has always been important, but given the challenging economic environment, always have an answer prepared to “How will you make money for the investors?” This is usually their key concern, after all.
- Get the right legal documents in place as early as possible. Things might not go according to plan, so you need a solid founders’ agreement or bespoke articles of association, and proper legal advice for any fundraising rounds to ensure that you’re protected if things go wrong.
- Grow your network. Try to get as much help from as many people, as quickly as possible. You never know who might be able to help you, and who knows who.
Are there any specific terms that founders should be particularly aware of? Are you seeing any push-back on any specific terms, and if so, why do you think this is?
There hasn’t been a massive shift in terms or more push-back on specific terms. Founders should remember that VCs still want and need to deploy their funds — they’re just a bit choosier about companies and are conducting lengthy due-diligences.
Having said that, more investors are asking for preferred shares, and participating preference shares have appeared in term sheets slightly more than in the last 1–2 years. But we’re seeing more changes to convertible terms — investors are being more demanding about their rights at that early-stage, particularly in regards to director/observer rights, pro-rata rights, and information rights.
In the longer-term, founders should be aware that new BVCA documents have just been published and that those terms might filter down across the rounds over the next year or so.
What key pieces of advice would you give for founders currently or planning to raise in 2023?
- Know your business. Understand the market, how the business proposes to exploit the current macroeconomic trends, your financials and projections. In brief, understand the issues and prepare answers for how you’ll deal with them. If a pitch isn’t successful, ask the investors for constructive feedback so you can improve it for next time.
- Consider ESG and diversity. Many investors are now requiring companies to have ESG/diversity policies and reports (although there has been a slight shift in focus towards diversity and away from ESG; it is unclear whether that is a permanent shift).
- Don’t raise if you don’t need to and don’t raise more than you absolutely need. Instead, try to cut costs and run your business as efficiently as possible until there is more certainty about the economy and confidence starts to return.
A huge thank you to Fran for her incredibly helpful insights. If you’d like further clarity on the topics mentioned here or to chat to Fran directly, she can be reached at frances.spooner@marriottharrison.co.uk.
We’ll be deep-diving into all the topics mentioned here at Sie Raise Summit on Thursday 23rd March, an in-person 1-day event focused entirely on fundraising. You can find out more about what to expect, who’s attending and company criteria via the event page.
For any other questions relating to Sie Ventures, please do contact us.
