The stock market faced significant challenges in 2022, with the S&P 500 dropping by nearly 20% and the tech-heavy Nasdaq falling more than 33%. This market volatility drove valuations down and led to a 65% reduction in both IPO and M&A activity, resulting in a liquidity crunch for private-market investors. Consequently, the venture deal count for private companies declined 29% year over year, and early-stage venture deal activity in Q1 of 2023 witnessed a six-quarter consecutive drop in deal value, despite the common assumption that early-stage companies are insulated from market turbulence. Early-stage deal activity, Pitchbook-NVCA Q1 2023 Venture Monitor, p. 12 In an economic downturn, startups face intense competition for limited funding, making it challenging to secure the necessary capital to sustain their operations. In this article, I’ll outline key trends in financing that startups should be aware of in order to stay competitive and move the fundraising process forward. Making smaller rounds last longer To adjust to the current market conditions, startups should consider lowering their fundraising targets, allowing longer durations between rounds and potentially accepting a lower valuation. Founders need to communicate these changes effectively to investors during the fundraising process. That includes updating the “Ask” section of their pitch decks to accurately reflect their company’s financial needs and the current market climate. Lower valuations Average Valuation, AngelList The State of U.S. Early-Stage Venture: 1Q23 report There has been a notable decline in startup valuations across various funding stages. While pre-seed valuations increased slightly in Q1 2023, seed-stage valuations declined by 5.7%, Series A valuations dropped by 14.1%, and Series B valuations declined by 2.5% relative to the previous quarter. For early-stage companies, these declines may not have a significant impact. However, for startups that have already raised capital and are looking to secure additional funding at higher valuations, the declining trend can pose challenges. This trend could be the primary reason why we see nonmarket standard deals from VCs, as founders may try to avoid raising funds at a lower valuation and, in turn, accept less-favorable deal terms they may not fully comprehend. Longer time to fundraise There has been an uptick in the duration between funding rounds for venture capital firms. As a result, startups are required to maintain their financial reserves for extended periods. Most investors are now urging their portfolio companies to secure sufficient funding to survive 18-24 months vs. 12-18 months historically. Average Months Elapsed Between Rounds, SVB State of the Markets H1 2023 Raising less capital However, while it’s now more critical than ever to ensure the amount raised is sufficient to support operations for an extended period without the need for additional fundraising, startups are raising less capital per round on average. The median amount of cash raised across rounds is shrinking, which means capital efficiency and lowering burn rates are paramount. Median Cash Raised by Stage and Quarter, Carta State of Private Markets: Q1 2023 Early-stage startups (SAFE financings) Moving on to deal mechanics, the vast majority of early-stage financings are typically conducted using SAFE (simple agreement for future equity) instruments — in fact, approximately 87% of pre-seed startups raised capital through a SAFE financing. Developed by Y Combinator in 2013, SAFEs are an appealing option for smaller rounds as they offer several advantages, which generally include: No need to determine the company’s value or price per share; No negotiation on governance or control (other than potentially providing investors with a side letter for board observer or pro rata rights); No board seats for investors; No information rights to investors; No voting rights for investors; No interest rate; and No maturity date. SAFEs essentially grant investors the right to convert their investment into equity at the next qualified financing round. This conversion feature provides investors with the potential for future returns, while allowing founders to secure funding without the need to set a valuation or establish governance terms. My suggestion for startups at the pre-seed or seed stage is to leverage the market standard SAFE financing documents found on Y Combinator’s website. By using these market standard documents, founders can streamline the fundraising process and avoid complex negotiations with investors who may require legal counsel to review nonstandard venture contracts. Preferred Investment Instrument by Round, AngelList The State of U.S. Early-Stage Venture: 1Q22 report, p. 9 Y Combinator primarily maintains two types of SAFEs — a