Raising Money During a Recession: What Are the 5 Signals VCs Look For?

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The market has changed in the last six months, with an economic slowdown and massive layoffs from the likes of Amazon and Google parent Alphabet. US VC investments and exits plummeted in 2022 and deal counts are down.

Many VCs are still investing, but at a slower pace. Now is a good time to run through the five main signals that really count when attempting to raise money during a recession.

ARR Growth Rate

In the last two to three years, investors became accustomed to seeing businesses tripling year over year. However, the market softened in the second half of 2022 — and everybody felt it.

Portfolio companies are starting to miss their quarterly targets, and this trend has prompted many VCs to reconsider growth expectations when assessing new deals. Growth rate will always remain an important signal for investors. But, with the current macroeconomic headwinds, 2x will replace 3x as the standard of good growth for the time being.

Net Dollar Retention (NDR)

NDR has emerged as the new golden metric in times of recession — and possibly even one of the most important signals when raising money. NDR simply describes how much money you are gaining or losing from your existing customers.

Here’s a simple example. If you have 10 customers paying $10,000 each annually, your ARR is $100,000. If you lose one but expand another customer’s contract from $10,000 to $20,000 annually, then you make up for the churn, and your NDR stays at 100%.

On the other hand, if you lose one customer and expand two customers’ contracts from $10,000 to $20,000 then your ARR is now at $110K and your NDR is at 110%. Even though you lost a customer, you made up the revenue by expanding on your existing accounts.

Your NDR remains above 100%.

By concentrating on existing customers, not only do you increase your opportunities to expand, but you’re also reducing churn risk. An NDR rate above 100% shows that your customers find so much value in your product that they are keen to buy more — more seats, more features, and more functionalities.

For now, investors are nervous about investing in a leaky bucket. It’s a sign that the product just isn’t refined enough — or that the business hasn’t identified a decent product market fit. An NDR rate under 100% is certain to put them off.

To learn more about how to improve your NDR, I recommend Ryan Floyd’s video “How to Master NDR”.

Gross Margins

This brings us to the 80% rule. At Storm, we specialize in B2B SaaS businesses, where margins north of 80% are expected. Anything under 80% will make investors pause and question why the cost of goods sold (COGS) is so high, and why the business is so capital-intensive. Is it because of the customer success cost?

Perhaps the product isn’t fully automated. Is it because hardware is involved? Is it because your AWS bill is too high? Today’s investors aren’t inclined to back companies that look capital-intensive due to product issues. Take care to watch your gross margins closely and have a convincing explanation ready if your numbers fall under 80%.


When we meet with entrepreneurs, they often present a slide detailing their plan to reach $20–$50m in ARR within three years. While it’s great to form an ambitious long-term vision for the business, that’s usually not what we’re looking for. We prefer to dig into the projections for the next two to three quarters.

The best way to validate these short-term projections is your pipeline. Ideally, your pipeline will be two to three times higher than the projected revenue. Due to the current market uncertainties, the bar is higher than ever before. Every investor will test for scenarios where the economy continues to perform poorly.

For this reason, I suggest you exercise great caution with your short-term projections. Make sure your pipeline can back up your numbers, or expect to be challenged.

Capital and Sales Efficiency

Cash is king! The attitude of ‘growth at any cost’ made sense for the past three or four years, but it no longer holds up. There has been a shift in focus from the top line to the bottom line of the financial data.

In the startup world, VCs generally don’t expect businesses to be cash flow positive.

But today, investors want to understand the capital efficiency of your business. In other words, how much cash you are burning on a monthly basis to grow at that 2x rate. After all, your burn rate will determine your runway — and how much time you have available before running low on cash and having to raise your next round.

We advise our portfolio companies to plan for at least two years of runway.

Sales efficiency is also more crucial than ever. If you are forced to let go of some of your sales reps, you need to make sure that your remaining staff can effectively deliver and hit those quotas. If they can’t, then your burn will increase and your runway will shrink.

In short, investors don’t want to be stuck in a position where they have to finance a bridge due to your failure to reach the expected milestones in time. They want to be confident that you are able to execute with less cash.

The Way Forward

I would also urge that patience is key. For the last two or three years, investors have rushed into making decisions because term sheets were moving around at record pace!

That’s not the case anymore, so VCs can take their time when running through the due diligence process. Take a deep breath and remember that delays are normal.

If you have any questions on raising money in a recession, you know what to do — ‘Ask a VC’ in the comment section below!

About Pascale Diaine: Pascale is a Partner at Storm Ventures. She focuses on sales & marketing automation, AI/ML, IIoT, retail tech, AR, computer vision, and robotics applied to the enterprise space.

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