How Startups Can Leverage Investor FOMO To Raise Funds Amid A Funding Winter

Long-term and intangible capital is what drives the transformation of a highly promising idea into a scalable business. For a change, creating investor FOMO (Fear Of Missing Out) has been an effective way for founders to raise such funds on favourable terms. 

A carefully crafted investor FOMO strategy pulls the investors towards the business and the founder. As a result, FOMO has emerged as a highly leveraged tool for influencing and accelerating investor decision-making. 

Investor FOMO & The Funding Downturn

In fact, investor FOMO had a good run in 2021 when global venture capital (VC) funding reached over $620 Bn, which is more than double the amount raised in 2020. According to Inc42, startups in India raised around $41.4 Bn in 2021, which is three times more than the funds raised in 2020. 

However, things have changed since then across the globe as well as India, the third largest startup ecosystem in the world after the US and China. The Fed rate hikes, inflationary pressures and prevailing geopolitical developments have made investors quite cautious. 

In Q3 2022, Indian startups recorded an 82% year-on-year decrease in quarterly investments and a 90% decrease in the mega deals ($100 Mn or above), signalling the onset of major funding winter for the startup ecosystem. 

According to Inc42’s Indian Tech Startup Funding Report Q3 2022, startups in India raised $3 Bn in Q3 (July-September) 2022, which is around 55 % lower than the funds raised in the previous quarter. The report also mentions that there has been a decrease in the average ticket size across all funding stages during that period. 

This funding downturn which is expected to prolong for the next few quarters merits a reality check — has investor FOMO lost its mojo amid unfavourable macroeconomic developments?   

Muted Investor Sentiments Call For A Fresh FOMO Strategy 

There is no escaping the fact that raising fresh capital has become a challenge for growth-stage or late-stage startups due to muted investor sentiment and changed evaluation metrics. There has been an emotion of valuation correction in India. 

However, the silver lining in the gloomy scenario is that the valuation repricing hasn’t been as sharp as it has been in other developed startup ecosystems. Moreover, there is a substantial amount of dry powder in the system. As per Inc42 analysis, this year saw the announcement and launch of approximately 126 funds, including venture capital funds, micro funds, corporate VC funds, and debt funds. These funds cumulatively raised over $18 Bn to invest in Indian startups.

Of the 126 funds, 62 VC and 5 PE funds announced and raised $13.9 Bn and $2.5 Bn, respectively, from limited partners (LPs) in 2022. 

Therefore, to bring investors back to the deal table, startups need to redefine their investor FOMO strategy. Early-stage and growth-stage companies now face the challenge of penetrating the decision-making arc of investors in order to elicit excitement and interest. This can only be accomplished through a robust business that focuses on unit economics as well as long-term profitability.

Is FOMO Here To Stay?

The inference that investor FOMO has fizzled out or has run its course doesn’t reflect the picture in totality. Investors still look for that FOMO quotient to validate their investment decisions, but this time it is based on solid economics rather than generic factors. 

The trend of hyping things up to jack up valuation and induce investors into rapid decision-making has become non-existent. In this phase, startups need to look beyond the conventional framework of buzz-opportunity-scarcity to evoke investor FOMO.

The shift in investor FOMO expectations has been triggered by investors’ growing preference for profitability over growth. Valuation metrics based on revenue multiples are now under intense scrutiny, signalling the expiry of the ‘growth at any cost’ narrative. 

As macroeconomic uncertainties have made capital expensive and investment decisions far more diligence-driven, investors are no longer keen to support cash burn. The business models must clearly project long-term growth and a path to profitability. The days of cyclical and sectoral FOMO are over. 

A tested product development strategy and efficient unit economics combine to create an appealing investor FOMO proposition for startup founders. 

Another way to go about this is to leverage the interconnectedness of the startup ecosystem and take the help of the existing investors to create FOMO for the next batch of investors. Building a strong fundraising pipeline is another effective way to increase investor FOMO. The idea is to demonstrate to potential investors that the opportunity will not last long. 

Building an investor FOMO during a funding slowdown is also about getting the pledge and outcome equation right. At a time when investors are not in a hurry to deploy capital, the founders of growth-stage startups who are majorly loaded with promises involving originality in the idea, leadership team, path to profitability, and more, need to develop a stronger engagement with the prospective investors. 

Investors usually look for evidence in terms of customer traction, profitability and revenue growth to issue bigger cheques. However, startups in the growth phase may not have adequate proof to clinch the deal. 

So, to build investor confidence, it becomes extremely critical for entrepreneurs to lead the process of meeting the investors, answering their tough questions, responding to their follow-up queries, etc. with efficiency and in a timely manner. Building investor FOMO during the seed or growth stage is also about proving the mettle as an entrepreneur as much as it is about the implementation of the idea. 

Investor FOMO is here to stay. The difference lies in the approach. Previously, the fundraising pitch was all about high growth numbers and big-ticket projections. In a muted scenario, the focus has firmly shifted to profitability and sustainable growth. 

Investor FOMO in this phase of evolution must reflect that reality, the way OTT platforms have dismantled the hollowness of glitz and glamour and put content and storytelling where they should belong.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.