Foodbytes hosts bimonthly, startup-exclusive virtual roundtables featuring a panel of experts across the food and ag industry and within Rabobank, with dozens of global startup founders attending, and the latest roundtable discussed Series A fundraising. Want to get invited to our next roundtable? Take 5 minutes to create your Foodbytes profile.
On June 12, our roundtable session covered Series A fundraising perspectives and tactics. Hosted by Foodbytes Data Intelligence Analyst Sonia Shekar, the conversation featured ArkeaBio CEO and Co-founder Colin South, Morrison Foerster Partner Chuck Cotter, and Rabo Securities Equity Private Placements Executive Director Guus Hovius.
Adapting to the Current Market: Early to Late-Stage Startup Considerations
How should the current state of later-stage VC factor into decisions companies are making at their earlier stages?
Market Shifts – Later stage VC slowly follows the public markets, where food tech and agtech activity has declined. On the tech side, artificial intelligence remains strong, with increased deal activity and valuations – creating a crowded and competitive environment.
Investor Fit – While raising Series A, consider whether an investor is a long-term partner or a one-time participant.
“It’s quite important at the Series A stage to find investors that understand the dynamics of the business and align with the decision-makers on the board. We see many deals fall through at the later stages for strong companies simply because certain board members are not aligned.” – Guus Hovius, Executive Director, Rabo Securities Equity Private Placements
Series A Preparation – Investors typically focus less on the specific series name (e.g., Series B) and more on the company’s maturity. The variation in round sizes reflects the total addressable market and associated risks.
Given the favorable market for investors, are there new considerations for series A term sheets and negotiation tactics specifically?
Make the fundraising process competitive – Be well-prepared with a clear business plan and ready materials. Longer timelines are expected in the current market as investors do deeper analysis. Getting fast answers back to investors creates competitiveness that allows negotiation on terms, such as valuation.
The importance of the term sheet stage – This is the point at which you have the most leverage. Investors may be worried that there are others submitting term sheets, and therefore they may be more willing to listen about an uptick in valuation, a reduction of rights and so on.
Setting Up for Success: Optimizing Your Network of Advisors & Mentors
How can Series A companies avoid mistakes in their fundraising process?
When it comes to communicating with investors and setting up your deal room, aim for quality over quantity. Investors will want to verify:
- IP Ownership: Ensure you truly own the intellectual property (IP) you’ve mentioned. Contracts with IP contributors should be clear.
- Founder Equity: Verify your equity ownership. Check for vesting agreements. Address promises made to others regarding equity.
- Business Relationships: Contracts with manufacturers, distributors, and developers matter. Ensure they align with your business goals.
At the term sheet stage, time is always a deal risk. Engage advisors early – before you are faced with critical decisions and your negotiation position may have already been compromised.
What adjustments should startups make related to their valuation and exit expectations?
Startup Valuation and Exit Expectations: In 2021 and early 2022, valuations were exceptionally high. Realistic expectations are crucial for successful deals. Investors seek returns typically 3-10x or more, so valuation should align with potential returns. Study public companies in your sector to understand trading prices and multiples.
“We are still seeing deals get done. Of course they are among the most promising companies, but they are more so among the most competent and realistic founders. In the last 12 to 18 months, successful founders adjusted their total raise downward if they were worried about dilution at a lower valuation. But they secured funding versus some founders sticking to 2021 or otherwise unrealistic valuations.” – Chuck Cotter, Partner, Morrison Foerster
Choosing Investors: Investors’ existing portfolios matter. Overvalued portfolios can hinder follow-on investments for you, so investigate who is actively investing in your space. In terms of your own business hygiene and intellectual property (IP), maintain clean cap tables, secure IP with NDAs and avoid surprises during investor due diligence.
Choosing Advisors: Very few founders have significant experience on the banking side, the venture capital fund side or the lawyer side, and the very best founders fill those gaps with advisors and mentors who have that subject matter expertise.
Then vs Now: Founder Perspective from a Recent Close
How do current market dynamics factor into a Series A Round?
Extended Timelines: What used to be an 8-week closing period now takes 8-12 months. Over an extended period of pitching, version control across interactions is critical. Keep track of what you’ve communicated to whom and maintain consistency in your go to market story.
“It can get really tiring, but you always have to be selling. Particularly in this environment, one bad interaction is enough to drive an investor away, and you might be talking to 40 or 50 different investors to get the round closed. Getting ghosted by a VC is not uncommon now, so always track down feedback when they say no, whether it’s because of their portfolio, your pitch, or the market evaluation.” – Colin South, CEO & Co-founder, ArkeaBio
Managing Investor Expectations: While you update the pitch for new investors, you must also manage the relationships with your existing investors, who have expectations based on their initial investment. Communicate transparently to avoid surprises.
Avoiding Down Rounds: Down rounds negatively impact founder ownership and control. Aim for a slight up round, even if modest (e.g., 5%). Adaptability, transparency, and resilience are essential in today’s fundraising landscape.
How can impact or mission-based stories factor into an early-stage funding strategy?
Mission-Focused Investment Thesis: Investors who share your mission are more receptive to your story. Be selective in your pitch—target investors who resonate with your mission. This may require a global reach, as it might not be possible to limit yourself to local investors.
Sustainability and Carbon Reduction: With additional scrutiny from impact investors around specific data points related to impact – reporting on sustainability is crucial. Prove that your solution contributes to reducing specific pollutants (e.g., nitrous oxides, methane). Impact investors also understand market risks differently. They may be more comfortable with climate-related risks (e.g. the opacity of carbon markets) than technology-specific risks.
Balancing Business and Impact: Focus primarily on your core business and avoid appearing as a “greenwash” company—genuine impact is essential. True impact investors are collaborative to find solutions when challenges arise. Since they’re tied to the mission, they generally don’t want to pivot away from the business – once committed, they tend to stay invested.
