For an unbroken run of well over a decade after the 2007 global recession, venture capital and private equity backers have been flush with cash and actively courting new business founders, especially in the buoyant IT sector. This is the only world many under-30 CEO founders know. They don’t know how to raise money in challenging markets.

During the high times, investors’ favoured investee businesses were run by persuasive founders and entrepreneurs, usually armed with great ideas, proprietary intellectual property, and the desire to disrupt established ways of delivering goods and services.

Well, that was then.

Today, VC and private equity backers are increasingly risk averse, primed for caution after living through the geopolitical travails of the Covid-19 pandemic, supply-chain disruption, persistent inflation and the ongoing conflicts in Ukraine and the Middle East.

Overreaching ambition

Moreover, private financiers have been chastened after some earlier hefty failures from businesses whose stories and ambitions were better than their management systems and skills.

Data reported in The New York Times and compiled by PitchBook, which tracks start-ups, showed that around 3,200 private venture-backed companies around the world went out of business last year. The knowledge of these failures is inevitably casting its shadow.

We are all familiar with the collapse of medical blood testing equipment maker Theranos. Its charismatic founder and CEO, Elizabeth Holmes, defrauded investors with false claims about its technology, which never worked.

And few could have missed the demise of WeWork, the serviced office business masquerading as a technology disruptor, which ate through more than $11bn (£8.6bn) in private finance and was even attempting an IPO just before the plug was finally pulled.

Also on the casualty list are lesser-known companies such as Olive AI, a healthcare start-up that raised $852m; Convoy, a freight start-up ($900m); Veev, a home construction start-up ($647m); Zeus Living, a real estate start-up ($150m); and Plastiq, a financial technology start-up that scooped $226m in private finance.

All these have either filed for bankruptcy or shut down. What’s worse, there are many more failures in the pipeline.

According to Jenny Lefcourt, an investor at Freestyle Capital, “As an industry, we should all be braced to hear about a lot more failures. The more money people got before the party ended, the longer the hangover.”

But this article is not a counsel of despair. The good news is that regardless of experience, running a successful founder-led company and raising capital is achievable with the right advisers. Board directors, seasoned investors, and advisory board members can provide game-changing guidance and critical connections.

In my view, businesses that have the best chance of clearing the ‘Series A’ hurdle should heed the following:

Be realistic. Investors are no longer interested in feel-good promises. They want to back businesses that can hit near-term milestones and demonstrate a clear path to success, on which fresh rounds of capital deliver sustainable new benefits rather than more working cash.

Be frugal. Remember, it’s someone else’s hard-earned money you will be using. The days of trophy head offices and profligate spending on salaries and perks are over. Save the belt-loosening for after sustainable profitability has been achieved.

Build and maintain VC relationships. These relationships need to be up and running before they are petitioned for funds, and certainly not when you are on the brink of running out of money. In my experience, start VC relationships six to 12 months before raising and aim to close your Series A funding round when you still have six to 12 months or more of cash on the balance sheet.

Show traction and momentum. Investors want to see companies that are nearing an inflection point that their investment will push over the line. And they want to see that it is sustainable. Being able to show six-plus months of growth is an important trend for investors. A proven way to get investors excited is to project a sense of forward momentum, whether that be in your business metrics, hiring, PR or marketing and advertising. They want evidence that your business is accelerating in as many ways as possible.

Refine and deliver a compelling narrative. What’s the purpose of your business? What problem was it built to solve, and how is it different? Can you tell your story simply and cleanly? Have you assembled the critical facts and figures that stand up to scrutiny under questioning? Ensure your narrative is realistic. Vision is vital, but your narrative needs to reflect reality.

Get the right capital structure and investor profile for your business. Cashflow and burn rate runway are fundamental, as is having adequate funds at the right time. Founders are aware of the importance of capital but more frequently miss the investment window. This is where board members, particularly those seats held by their venture investors, need to give the most guidance, as getting this wrong can cost their investment.

Technology advisory panels. Consider setting up an advisory panel with outside views on technology and future trends. Small companies may struggle to have this expertise in-house. Be sure to listen and act on its recommendations at board meetings. This is even more imperative with the opportunities and challenges related to AI.

You need directors who can offer guidance on emerging technological and geopolitical threats and opportunities.

While it is undoubtedly tougher to raise money in this market and likely to get even more demanding as VCs look to decide which young companies are worth saving while urging others to shut down or sell, there is plenty of private finance still looking to back the businesses that know how to put it to the best use.

Frank De Maria is MD and Founder of New York-based strategic communications consultancy Purposeful Advisors