As we plunge into 2023—amid rate hikes, market turbulence, inflation worries, tech-industry job cuts—it feels like it’s a good time to talk about raising capital.

By “raising capital” we mean finding investors—individuals and venture capitalists—to put money into your company in exchange for equity.

It’s an interesting time to pursue investors. The economy is awash in uncertainty. And ordinarily that would cause investors to slow down, stop cutting checks, hide in a dark room and weep quietly.

And that seems to be happening. Sort of.

Because on the other hand venture capitalists are sitting on $300 billion (or more) in dry powder—that is, cash committed to venture funds that has yet to be invested. Typically venture funds exist for 10 years and then sell off their investments and return the proceeds to their investors. Most of a fund’s capital is invested in the first three to five years of that fund cycle and returned to investors over the next five.

In other words, the venture industry has a mandate to invest $300 billion (or more) in startups over the next few years. That’s more cash than has ever been available in the history of venture capital.

Ever, ever.

So which will it be? Fear, uncertainty, weeping quietly in the dark? Or a return to the 2021 feeding frenzy of VCs stuffing startups with capital like so many fois gras geese?

A bit of both is what we’re seeing.

Although there has been some notable discussion of VCs declining to make investments and instead returning uninvested capital to their investors—for example, on the All In Podcast—there doesn’t seem to be much evidence of and little historic precedent for that kind of a move.

Trends from Pitchbook data over 2022 show valuations dropping for late-stage rounds: Series C, D, and beyond. Late rounds are increasingly funded by investors with exposure to public markets, so they’re feeling pain. And IPOs are frozen and acquisitions are slowed. (Though, frankly, valuations are still up from 2020. It’s mostly just that 2021 was massively out of trend.)

For Seed and Series A rounds valuations are steady or even up from 2021. That’s what Pitchbook says and it matches our anecdotal observations and what we’ve heard from VCs.

What doesn’t show up in valuation numbers is a consensus expectation that investors are getting more selective and returning to actual due diligence before cutting checks—as opposed to the cursory nod toward the diligence checklist (roughly Churchill’s approach to vermouth) that prevailed over the past two years. The degree of diligence will no doubt vary by industry: expect recklessly fast deals in AI for the next six months and painfully slow ones in crypto maybe forever.

If we are marching into a serious recession, here’s an interesting bit of history. The following companies were founded in or immediately after the recession of 2007-2009 (which was a pretty bad one): Slack, Stripe, Uber, Square, AirBNB, Twillio, Zendesk, Okta, and Dropbox.

Not only is it possible to raise during a recession, there is some evidence that the strongest companies are founded at the worst of times.

Why?

The speculative fever has broken. Capitalists and entrepreneurs are again focused on productive capital. Skilled employees are being cut loose and available for cheap (relatively). Competitors are failing. Customers are open to change—particularly the kind of cost-cutting, efficiency improving change that tech delivers.

All well and good. What’s the takeaway?

If you plan to raise an Angel, Seed, or Series A round in 2023:

1. Expect the process to take longer than in recent years. Plan for six months, not three. Maybe more.

2. Get your house in order. Diligence has never been rigorous in these early rounds. But you should at least have your organizing agreements and corporate filings in place, your customer contracts in order, and your employment agreements and IP assignments signed. Things like that.

And most importantly:

3. ASK FOR MORE MONEY! Seriously. Cash is available. But it’s chasing fewer high-quality deals. So when deals do get done, valuations are up. Make your deal a high-quality deal—get your house in order, have a thoughtful business model, address a sizable TAM—and ask for more money on better terms!

Over the next few of these emails we’ll give you some tips for finding the right investors (in any economy), negotiating term sheets, and if we’re being honest probably rant a bit about SAFEs.