Fundraising in a challenging market: How startups can secure cash

Despite economic challenges, South African startups can still find funding if you know where to look and how best to position your business for success.

In this article, we look at how you can best prepare for an investor meeting, highlight alternative funding that may be available to your business, and reveal the steps to take to impress investors.

 Here’s what we’ll cover:

Adapting to the new funding reality

As a founder in South Africa’s evolving startup ecosystem, you’ve likely noticed that valuations have declined across the board.

What was once a market where ambitious projections could secure generous funding has shifted to one where pragmatism rules.

“As an entrepreneur, I know how hard it is to raise money, particularly during the challenging times we’ve experienced over the last two years,” says Miguel Arias, general partner at Kfund.

“Every founder has noticed that valuations have declined, not dramatically, but quite a lot.

“Nowadays, 10 times annual recurring revenue (ARR) has become the norm for the best companies, compared to the past when there was an exuberance of capital and valuations, and anything was possible.”

Focus on self-sufficiency first

Investors in today’s market are placing greater emphasis on efficiency and early revenue generation.

So, before approaching investors, you need to have a crystal-clear understanding of exactly how much capital your startup requires to reach specific growth milestones.

“A couple of years ago, investing in a company was thrilling,” says Wim Derkinderen, general partner and co-founder at PitchDrive.

“We were typically the first to write a cheque, companies could just do their thing, and in six to eight months we would proceed with the next round.

“Today, with everything going on, things are different.

“Our goal is to help startups get through the challenging economic situation [so] we are focusing much more on efficiency and looking at revenue much earlier than before. It’s not just growth, growth, growth.”

To demonstrate this focus on self-sufficiency, prepare to answer these questions:

• How will you use the funding to generate revenue within a specific timeframe?
• What is your customer acquisition cost, and how will it evolve as you scale?
• What minimum viable revenue targets will you hit with this funding round?

Add professionalism to your fundraising process

With less money in this market, even the funds that have cash are becoming harder to access.

That means you can’t afford to approach fundraising casually or without thorough preparation.

“For example, in 2020 or 2021, founders would say they need to raise five million just because they want the money but nowadays, candidates need to come prepared,” says Anna Mazarsky, who works with female entrepreneurs to source funding.

“They need to know what they’re fundraising for, how much money they need, why they need the money, and what it will be spent on.”

Before your first investor meeting, ensure you’ve prepared:

• A clear statement of how much you’re raising and why that specific amount
• Detailed allocation plans for the capital
• Realistic projections based on verifiable market data
• A timeline of expected milestones the funding will help you achieve.

Explore alternative funding sources

Traditional venture capital isn’t your only option for securing funding in South Africa.

Government initiatives, industry-specific grants, and emerging financial instruments provide alternatives worth exploring.

“Many startups are unaware that there are banks that cater specifically to their types of businesses, and this can be an important source of funding that eases the pressure of securing money from venture capitalists or angel investors,” says Anna.

“I’ve been focusing more on this approach recently, and it’s proven to be very successful. It can provide much-needed breathing room during the fundraising process.”

South African founders should consider exploring the Department of Trade, Industry and Competition (DTIC) funding programmes, Technology Innovation Agency (TIA) seed funding, as well as options from the Industrial Development Corporation (IDC) and Small Enterprise Finance Agency (SEFA).

Stand out in a competitive market

The best businesses will rise to the top in this challenging environment.

This means you need to position your startup as exceptional rather than average.

“There’s still money out there,” says Anna. “Despite the fact that this is a bear market, you still have funds and venture capitalists that raised their funds in previous years.”

“They are now obliged to invest, right? So there’s still money available.”

“It may be tougher to acquire, and you need to prove yourself. If you’re a bad startup, you won’t succeed. But if you’re a good startup, you will get investment.”

Even first-time entrepreneurs can succeed in this market, though it may be more challenging than for those with prior experience.

“Money is just money,” says Wim. “Today, adding value for investors, opening networks, doing introductions, and helping founders is what matters.

“Being in the mud with the guys is essential. That’s why, once the money is in, they can call us day and night and we are there for them.”

“I actually love it when they call me at three o’clock in the morning on a Saturday with a challenge they need to solve by Monday. These are good founders.”

Target resilient sectors

Certain industries are proving to be more resilient to economic headwinds, making them more attractive to cautious investors.

“Currently, I see two verticals that are more immune to the market correction: anything related to climate change or environmental conservation, and anything in the health tech space,” says Miguel at Kfund.

“If you can position your startup around these two verticals, you may attract more investors and secure better valuations.”

If your business addresses climate adaptation, renewable energy, healthcare access, or environmental conservation, emphasise these elements in your pitch.

South African investors are particularly attuned to startups addressing local challenges with scalable solutions.

Prepare for a longer fundraising journey

The days of quick funding decisions are over.

You’ll need patience and perseverance as investors take more time to conduct due diligence and review documentation.

“Fundraising is supposed to be hard,” says Miguel. “Just focus on execution to get the money you need, use it wisely, and grow your business. And be thankful that you have the privilege to work in your field and can change people’s lives.”

This means maintaining sufficient operating capital while you secure your next round, a significant shift from the shorter timelines that were once standard.

Consider venture debt as an alternative

For South African startups already generating revenue, venture debt offers a compelling alternative to equity financing.

This specialised form of financing is designed for high-growth, early stage companies and is offered by venture debt funds and banks with the right expertise.

“In these uncertain times for venture capital, many companies are considering raising debt instead,” says Jordi-Ferrán Penina, senior investment manager at Axon Partners Group.

“This allows them to extend their runway and add to the company’s valuation, better preparing them for when the market is expected to normalise.”

The benefits include:

• Non-dilutive financing that preserves your ownership stake
• More flexible repayment terms than traditional bank loans
• Faster access to capital compared to equity rounds
• Strengthening your position for future equity raises.

“By raising debt, you can maximise value creation while minimising dilution in subsequent financing,” says Jordi-Ferrán. “Our money always generates value for the company. Otherwise, it would be an investment without a sense of purpose.”

How to impress potential investors

Ultimately, success in fundraising comes down to positioning your startup as exceptional.

Follow these practical steps to impress investors:

Do thorough competitive analysis

Understand your market value and unique selling points, both for the present and future.

A well-executed competitive analysis helps you stand out and demonstrate your startup’s distinctiveness.

Research and target the right investors

Be prepared and know why you want a specific investor.

Tailor your story to fit their interests, whether it’s e-commerce, social impact, or revenue growth.

Create tailored pitch decks for each investor

Different investors have varying interests, so craft a unique pitch for each to increase your chances of success.

The extra effort helps you approach the fundraising process more efficiently.

Invest in your pitch

Treat interactions with investors seriously and be ready to impress them.

Invest time and money in developing a high-quality pitch, rather than relying on low-cost shortcuts.

Treat investor meetings as opportunities

If they’re taking the time to meet with you, it means there’s something there they want to explore.

Make the most of it by being prepared, professional, and focused on impressing them with your startup’s potential.

Final thoughts

Fundraising in South Africa’s current market is undoubtedly challenging, but funding is still available for startups that demonstrate resilience, efficiency, and market fit.

By approaching the process with professionalism, targeting the right investors, and exploring alternative funding sources, you can secure the capital needed to grow your business.

As you navigate this funding landscape, remember that the discipline required in tougher markets often builds stronger companies.

Focus on building a business that can thrive even with less capital, and you’ll position yourself for success regardless of market conditions.