Raising Fund II—in this economy?
And the reason down rounds are no longer considered a death sentence.
Hi all,
Happy Monday! You may have noticed the absence of last week’s newsletter. I’ve been taking some time to think through the strategy behind Due Diligence—from episode cadence and structure to key themes to dream guests—and reflect on some of the lessons from the first 100 days. Having taken a beat, I’m back with this week’s episode featuring creator Valeria Lipovetsky on her journey to 5M+ followers (key takeaways below). Can’t wait for you to give it a listen.
One piece of content that’s been on my mid this week is this article from The Information on the challenges that await VC newcomers as they prepare to raise their second funds, and how they disproportionately affect fund managers from underrepresented groups.
New fund managers face an uphill battle to begin with, but with plummeting tech stocks, economic uncertainty, and increased diligence from LPs who are looking to reduce exposure to venture while prioritizing more established relationships, first and second-time managers are closing funds nearly 50% short of their original goals.
Total funding for U.S.-based VCs may have increased by 8% in 2022 (though this year, that number is projected to be at its lowest since 2017)—but women-led venture firms saw a 35% drop in funding last year.
Why does this matter?
If a worthy collective goal is to increase the % of venture capital dollars flowing into companies started by diverse founders, then setbacks that impede the flow of LP dollars into diverse fund managers is an upstream variable worth examining. After all, at least from the gender parity perspective, “female investors are twice as likely to invest in female-founded startups and three times as likely to invest in female CEOs.” And given the fact that last year, entirely women-led companies only received 1.9% of all VC funding (down from 2.4% in 2021), it appears the funding prospects for female founders aren’t particularly rosy either.
Certainly less proven managers across the board are experiencing setbacks and after LPs regain their appetite for exposure to the volatile asset class that is venture, things will pick back up. But a valid concern for anyone who shares my desire to see the gender gap close is that the increased allocation of institutional dollars into diverse founders and funders was yet another ZIRP phenomenon fueled by an abundance of dry powder and short-lived cultural hype around equity and inclusion that were more performative than substantive.
Only time will tell, and in the long run I’m cautiously optimistic. But in the meantime I hope to personally double down on celebrating and amplifying all who are defying these aforementioned odds.
xx
Dulma
THE BOTTOM LINE
The three things from each episode that you need to know.
Valeria Lipovetsky — Staying True To Yourself As A Creator
On Dealing with Creator Burnout:
It’s easy to get burned out when you’re doing the same thing over and over again. Dedicate 70% of your time to creating content you know is aligned with your brand and will perform well, and leave 30% of time for experimentation. “It may even give you a different storytelling angle for the industry you want to be a thought leader in.”
Take time to shut off, step away, and not put any pressure on yourself. When you give yourself that space, your brain will naturally start to become active and energized again.
Identify triggers that let you know when you’re approaching burnout—at 70 or 80%—not when you’re completely drained. And then take the steps you need to recover. “If you keep fighting it, you’re constantly going to be in survival mode.”
On Not Submitting to Your Ego: Especially as a creator, it’s important for projects you take on to be motivated by the right thing. Recognize when it “becomes a show, and it’s no longer about [proving something] to yourself or pushing yourself” and then remove yourself from the situation. Take a step back and think about whether you’re pursuing something because of what other people are going to think or how it’s going to appear, or whether it’s something you truly want—and then proceed accordingly.
On The Importance of Failure: Failure separates you from your ego, provides clarity, and allows you to figure out what your powers actually are. “I prefer to try things, let them fail, and then move onto the next, rather than deciding I don’t belong somewhere.” When you realize how important failure is, you begin to lose your fear of it.
This is just the bottom line from my conversation with Valeria. For the rest of our discussion, listen to the podcast episode here.
LEARNING FUND
Invest in your business knowledge.
This Week: “Down Round”
Example: In 2007, Facebook raised $240 million from Microsoft, at a valuation of $15 billion. Two years later, it raised another $200 million round, but at a valuation of $10 billion.
Down rounds can be caused by problems within the company—missing revenue goals or product development milestones—but also by changing or declining market conditions.
A year ago, economic conditions made it way easier for founders to raise money than it is today. But an unfavorable economic climate doesn’t mean founders can stop seeking capital—they may just have to accept the price the market is willing to pay and raise a down round.
In fact, on Carta, the percent of companies that were down rounds on a pre-money basis jumped 7.5% in 2022, from 5% in Q1 to 12.5% in Q3.
Though down rounds can sometimes signal internal turmoil and take a toll on employee morale, they’re becoming increasingly common and are no longer considered a company black mark (especially given the current economic climate). In fact, down rounds can lead to founders rethinking distribution and paths to profitability in a way that may set up a startup for greater success in the future.
SMALL INVESTMENTS, HIGH RETURNS
A little support goes a long way.
This Week: The Tory Burch Foundation
Tory Burch may be best known for her namesake brand’s monogrammed flats or trendy shoulder bags, but did you know she initially launched her company to create a foundation for women entrepreneurs?
The Tory Burch Foundation, launched in 2009, supports women and women entrepreneurs by providing access to education, digital resources and capital.
They offer a year-long Fellowship Program (alumni include Denise Woodard of Partake and Sashee Chandran of Tea Drops), from which 15% of fellows go on to raise venture capital—compared to all-women teams raising only 1.9% of VC funding in 2022—and 27% generate $1 million+ in sales.
The Foundation also hosts regular digital programming and webinars, provides access to affordable loans through a partnership with Bank of America, and most recently, launched a Funding Finder tool to help entrepreneurs find the best source of funding for their businesses.
Worth checking out for early stage founders looking for more support & resources!
Got a product or brand you want us to shout out? Nominate them below!👇🏼