Startups: 5 tips for fundraising in a bear market
Rolling SAFEs, bridge rounds, evergreen fundraising and other tactics to increase your odds of success
It’s no secret that getting funding for a gaming startup is more difficult in 2024/25, especially if you’re looking to get that larger Series A/B check. There’s many reasons for this, among them: geo-politics and CFIUS reducing foreign publisher spend, industry growth being flat after COVID, a low signal to capital ratio, and VCs rationalizing after a hot market. A core overarching trend is also less control over distribution; a lot of the top games of 2024 came out of relative obscurity like Balatro or Palworld. Distribution is now algorithm driven and developers and their investors have to adapt to a shifting landscape for getting their game in the hands of players.
You already know this. So let’s cut to the chase and talk about a few ideas for raising money in a down market. This essay is for any startup that’s raising in a presently contrarian market. And if you want more game studio specific advice, you can read my earlier essay here.
Why take my word for it? We’ve advised hundreds of founders through SPEEDRUN, and have a unique vantage point on the market having seen so many deals go down at the seed, Series A, and Series B stage. What I’m writing about are some of the principles that we teach during the program, so we practice what we preach. We also can take lessons from adjacent markets in tech and crypto, whose cycles tend to move faster than in gaming.
Price the Market
Work with your current investors and founder friends to understand where the market is at currently. Another good way to get data is pull deals from Pitchbook in the last year in your sector, or ask investors when the last deal they did was. That’ll give you a sense of money velocity in the system. And remember that when deals are announced, these are lagging indicators. Don’t point to a deal that happened 1.5 years ago, announced five months ago, and say “Oh well I’m better than X so I should be able to raise Y too.” The most common mistake I see is if founders overvalue their startup and team and go out to raise too much. Because private markets are illiquid, valuations can be based off a few bidders and there are no clear metrics early on to benchmark revenue / EBITDA / FCF to. As such, investors are looking for signal in lieu of financials: team, story, opportunity, product, user metrics, etc. You need to know where your value is in market, and price at or below that point. Why?
It’s way easier to raise the valuation / round size once you have some term sheets and actual heat on the round. That gives you leverage. And leverage allows you to command the actual terms that you want. If you go out for too high of a valuation, you could turn off VCs that may have otherwise been interested because it’s just out of their range. For instance, a $12M round would be a Series A that only multi-stage funds can afford, but a $7M round could be considered a larger seed round that some early stage funds could stretch for. A bigger pool of investors increases the odds that you can get that first TS. I like to say there’s two games in fundraising: the game to get the first TS (sourcing and closing) and the game after the first TS (negotiating). Make sure you optimize your sourcing and closing game as much as possible.
Don’t raise based off ego, raise based off reality.
Evergreen Fundraising
In bear markets, investors will be more discerning about teams and traction, and you’ll likely have longer lead times for the round unless you have some crazy traction numbers (e.g., your D30 retention from early tests is close to 25% for a mobile game). That means you’ll have to spend more time doing relationship building, and giving the investor more conviction in your founding team and understand the business better.
There’s a few tactics in order to do this well. The first is investor updates. A good investor update will be structured and succinct. Investors get a lot of inbound, and so you want every update to highlight tangible changes in the company, such as an important hire, a new enterprise contract, a new build milestone, or an inflection in usage / engagement. Do not write overly long or overly frequent investor updates or they’ll just skim and tl;dr it. You can use open rate as a rough proxy for how effective your investor updates are. 60% should be a good benchmark to shoot for.
The second is very basic. Meet in person whenever you can. It’s a great litmus test on both sides. First you can see whether the investor is serious about your startup, since IRL meetings tend to take longer and are higher friction compared to zoom. And second you can get a read in person, and notice all the subtle cues that might be lost digitally. After all, it’s a two way street. If you take the investor’s money you’ll be working with years or even decades so you better get along.
The third is to test the waters early but not often. One tactic you can use is to schedule quarterly catch-ups with investors you respect and have a good relationship with, ostensibly for advice on company building, product strategy, hiring, etc. This will allow you to build a more durable relationship with the investor, and give you a soft check on how excited they are about you. If they schedule more meetings, if the meeting goes long, if they really dig into your metrics, these are all good signs that it could be time to raise. You can also ask these trusted investors specific metrics / milestones they’re looking for at different stages. Good investors will give you a direct answer: “I’m looking for X retention metrics or Y ROAS curves or Z demonstrated ability to ship from the team.”
However, do not formally raise too frequently. You can only come to the well so many times before investors start having doubts about the company health and downstream financing opportunities. What they’ll be thinking is, “If everyone else passed what did they see that I’m not?” I’ve seen some startups that are always raising for an entire year, and that can paradoxically make the raise harder. Make the hard decisions, cut burn, get back to shipping, and come to the market again when you can show some tangible progress. Marc wrote about this situation - “When VCs say no” - almost two decades ago but the advice still rings very true today.
Finally, you may want to go to a broader set of investors. In bull markets you have the luxury of choosing who you’d like to work with, but in bear markets you need to treat capital as more of a commodity. Tap the long tail of investors: smaller VCs, family offices, high net worth angels, VCs from other geographies. You’ll need to expand the radius, often to 60 or even 100 investors, to increase the chances you get a bite. The key is to get enough data on the long tail of investors that you can improve your signal to noise ratio and figure out who is most likely to be interested in what you’re building. You can do this by looking through Pitchbook or Crunchbase for similar companies and analyze their cap tables or look at what the investor track record was, or backchannel by asking founder friends for intel. The broader set of investors will allow you to more effectively leverage the next tactic I’ll discuss below.
Rolling SAFE Strategy
One strategy you can use if the leads aren’t biting is what we call the “Rolling SAFE strategy.” Essentially you turn a round into smaller chunks at progressively higher valuations that creates more urgency and allows smaller investors to effectively “lead” a small tranche.
Say you want to raise a $5M seed at $25M post-money valuation (equivalent to 20% dilution not accounting for the option pool). Turn that into a $1M on $15M tranche (6.6%), a $2M on $20M tranche (10%), and a $2M on $30M tranche (6.6%). These are dummy numbers, but you get the idea. You should break the round into achievable goals (the first two tranches) and stretch goals (the last tranche) by identifying what is the minimum amount of capital you need to get back to building and achieve your next milestone.
There are several tradeoffs for this strategy:
Pro: You allow smaller investors to lead a tranche. You may be in the situation right now where a lot of follow-on investors say “I’m in for $XM, but only if you find a lead.” Very frustrating. With this method, you want to go to your biggest follow-on investors that have the most conviction in you and say “Hey, would you be interested in leading a capped SAFE at a lower valuation so that we can get back to building?” Your give is the lower valuation, and your get is that you start closing investors out, right now. Get two $500K follow-on investors to agree and your first tranche is closed.
Pro: You create momentum. This is the most important part of the fundraise. Now you can go to other investors and say you’ve closed your first tranche and have $1M committed and wiring, and ask whether they would be interested in the next tranche. Investors, even at the early stage, can be momentum investors so you want to create a feeling of urgency and time pressure to get them to make a decision.
Pro: You can more effectively price discriminate. Different investors may have different ownership and valuation requirements based off the size of their fund. The old adage is true: your fund size is your strategy. Rolling SAFEs allow you to group investors into different buckets so that you can try to get the ones you want in each tranche, and ideally assemble the team that you like.
Pro: You can turn the round into a priced round if a lead materializes. One important nuance to this strategy is that lead investors will often have ownership requirements that are larger than your tranches. No problem, if they get really interested then you can also turn this into a back-to-back priced round, where you raised your first tranche as a SAFE and then the next one as a priced round shortly after. However, you should be careful about staging conversations, so that the lead investor does not come in too late when too much of the round is already committed and you don’t actually have space for them anymore.
Con: You’ll take more dilution. You must create a give for your early believers who are willing to roll the first SAFE, and that often will be a lower valuation than you’d ideally like. You will likely take more dilution in this scenario net-net compared to a proper priced round. The situation you must avoid at all costs, is that stacking SAFEs will create a very punitive situation if the SAFEs do not realize at their cap. Often the SAFE cap is interpreted as the price of the round by future investors, but not always. If the market shifts or the company does not make sufficient progress, you don’t want to be left with a lot of SAFEs converting at a lower valuation and diluting you too heavily. In that scenario you will likely have to do some cap table management with your existing investors to figure out what’s fair.
Con: You’ll have more constituents on your cap table. Because you won’t have one lead investor taking up most of the round, you’ll have to manage a group of investors who could be different from traditional VCs. In order to effectively raise in a down market, you likely have to go very wide, to family offices, to high net worth individuals, to different geographies, and these investors could have very different expectations for how you run the company. Be thoughtful about setting expectations early so you don’t have time-wasting disputes down the line.
Bridge Rounds
I won’t sugarcoat it; bridge rounds are generally a tough conversation with your current investors about the state of the business and what the future looks like. Usually you’ll have the insiders lead and have some external parties match in order to inject more capital into the company. The best advice is preemptive, you should already have a strong relationship with your current investors and they should be brought along for the ride with frequent updates. That way you increase the odds that they consider you one of the best teams in their portfolio, even if you haven’t quite yet nailed PMF yet for one reason or another.
Generally a bridge round will be flat or down-round in order to create an incentive for investors, and you’ll need to paint a story about where the bridge goes to. This $XM bridge will give us 12 months of runway in order to ship product Y and get metrics ABC. Or we have early signals of PMF through our retention / engagement / playtests / etc. and we need the extra capital in order to scale. The bridge should always bridge towards a tangible outcome, and you may have to stomach more dilution in order to get the capital you need. Ideally you have some interested new external parties that are interested but need a lead investor, and one of your insiders will step up to price that bridge round.
Opportunity and Runway Planning
Being too early to a market is the same thing as being wrong. Be realistic about the opportunity you’re going after, and whether you have to refactor the company and pivot to go after a new opportunity. On one hand startups are contrarian by design and you need strong conviction in your idea. On the other hand you don’t want to be blindly stubborn to the realities of the market. You should decide the balance. For what it’s worth, many great companies such as Discord or Slack famously came out of pivots where they realized the current direction wasn’t working, and went into cockroach mode in order to build the new product that they believed in.
The other piece of advice is to be more conservative when you do get a fresh injection of new capital since you may need to wait out the bear market. The typical advice of a VC is to plan for 18-24 months of runway, but they’re not always clear about how or when. You may want to consider planning for 36 months instead of 24 months. There are other options to extend runway through outsourcing, contracting, or hiring internationally. I’ve had some startups have success with looking for 10x engineer college grads based off their OSS projects or Github commits. Get creative and be thoughtful about your capital. Of course, if you see PMF you should double down on that opportunity, and in general your burn should match the stage/traction of the company. Stay lean while you’re exploring, and expand aggressively when you’ve struck gold.
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z. A list of investments made by funds managed by Andreessen Horowitz is available at https://a16z.com/investment-list/.
really gold and of great value for founders.
Absolute gold, thank you.