To better understand how to improve your chances of success for fundraising in a downturn, here are the top six suggestions for raising capital in the current market environment.
For more than a decade, the wind has been at the backs of many businesses. It was doable to raise a lot of money quickly. However, given the state of the macroeconomic environment right now, it would seem that the opposite will be true in 2023. Startups seeking capital are finding it difficult to do so as interest rates of financial institutions start to rise and consumption patterns start to change. It’s not likely, though.
It might seem strange to use the words “fundraising” and “downturn” in the same sentence. However, it’s crucial to keep in mind that investors are doing the same things that businesses are doing—cutting costs and scrutinizing spending. They are simply being more picky about which companies to invest in and how much; they are not pausing their investments. This indicates that both parties are now operating under new ground rules.
1. Don’t wait it out
It might be alluring to put your company in limbo and come back when the macroeconomic climate is more favorable. But it’s imperative to resist that inclination. Keep in mind that investors want to place their money where they anticipate growth and progress. They will find it difficult to believe that the years following a downturn will be any different if there hasn’t been any movement within your startup for a year or two. Investors will eventually start to pull away, and finding new ones will be difficult.
During a downturn, instead of hibernating, consider what your company needs to succeed and advance. The takeaway from this is not to cut all spending, but rather to cut spending wisely while maintaining your long-term investments. Reduce burn as much as you like, but don’t stop all activity. Discover the critical wagers to place to maintain growth and enhance profitability, which includes fundraising in large measure. You must make significant investments in the vital component that drives your company’s expansion.
2. Get your fundraising going earlier and look into your options.
The fundraising procedure is taking longer than usual because of how quickly the economic environment is changing. The general rule was to start fundraising with at least 6 months to spare; however, that time frame has since been raised to about 12 months. Therefore, get fundraising started before you think you need to.
Also, don’t forget to look into your financing choices. For instance, venture debt, which offers financing to promising businesses that are not cash flow positive as long as they demonstrate a strong potential for growth, is becoming more and more popular among early stage founders and can be a viable option. Other non-traditional funding options include convertible debt, SAFEs, structured equity deals, equity deals with non-standard clauses, and revenue-based financing.
There are many financing options available today, but choosing the best one will depend on the particular circumstances of your business, your financial objectives, and the shape you want to give your cap table.
3. Make it simple for investors to accept your offer.
Recognize your investors
This market shift is as unsettling for business owners as it is for their investors. Therefore, make an effort to comprehend your investor’s position and practice empathy. Find out what makes them hesitant and afraid. Knowing the reasons why they aren’t investing will help you create a plan that allays their concerns. It is simpler to allay your investor’s fears the better you know them.
Organize your back office.
Clean up your home before inviting guests over. Investors want to know that you’re concentrating on product development, market expansion, and growth rather than back office administration. To ensure that your bookkeeping, accounting, taxes, and strategic finance consulting are being handled by devoted professionals, If investors can clearly see your financial situation, a tidy, well-maintained back office will help them to get a better understanding of your business.
Analyze your funding requirements
Outline your company’s objectives in detail, along with the amount of funding you’ll need to reach those objectives. You relieve the investors of the majority of the work by detailing how the requested sum will advance your business. Having a well-thought-out plan in place before approaching them demonstrates your business acumen and sincere commitment to following through on your promise (s).
4. It’s harder to find cash. Examine ROI critically.
Prepare your company for all potential outcomes. Make sure you’re taking proactive steps to sustain your business in the event that fundraising is stalled or delayed. One aspect of the equation involves lowering operating costs; the other involves using tactics and strategy to ensure successful results. Two strategies exist for doing this.
Boost Cash Flow
Start by improving your cash flow. The following four actions will help you increase your bank account balance:
- By selling more to existing customers or more to new customers, you can increase revenue.
- By using more effective methods of selling, you can raise gross margins.
- Enhance your terms of payment or encourage more of your customers to pay in advance or to prepay quarterly or yearly.
- Finally, reduce spending or eliminate expenses you can live without.
The majority of businesses can’t find a magic solution. Pulling all four levers simultaneously is the only way to fully control your ability to increase cash flow.
Concentrate on Key Metrics
Second, pay attention to important indicators of investments and recurring income, such as the following:
- Understand your burn rate
- Understand your anticipated burn rate
- Determine how much cash runway you have.
For instance, if your runway is less than 18 months, you must significantly cut burn or find additional funding. Make sure your executive team is aware of all the possibilities for expanding the runway and the tradeoffs each one entails.
Close your round as soon as you can if you’re in the middle of fundraising. Additionally, if you are unable to raise money at this time, be sure you know what you must accomplish in order to unlock your next round of funding, such as launching your product, earning $10 million in revenue annually, or bringing your burn rate multiple down to 1.5.
5. Permit support from your current investors.
In difficult times, it’s simple for a founder to feel like the weight of the world is on their shoulders. However, it is your investors’ duty to guide you through them. Remember that raising money doesn’t always require finding new investors. See where your current friends can help by working with them.
Up to 90% of the investments that investors participate in are led by them. They are aware that participation entails responsibility. They will be forced to take the helm and drive follow-on funding if your business keeps making good on its commitments and continues to add value even during a downturn. Investors don’t want to see a trustworthy company fail because of a brief market blip. Gaining profitability and maintaining positive contribution margins are essential for surviving difficult times. Your partners will support you in bridging the gap more as you continue to do this.
As a result, it’s critical to have a firm understanding of your fundamentals, such as unit economics. They’ll assist you in getting there if short-term growth entails a pay increase.
6. Remember that losing a round does not necessarily result in death.
The last ten years have been marked by a bull market, which has given many founders the luxury of rising stock prices and upbeat investor sentiment. Their daily lives have mostly been marked by rising capital availability and significant cash flow. They have never had to navigate down rounds before as a result. Even though going through an economic downturn isn’t always pleasant, it’s important to remember that it’s better than dying.
Therefore, consider any term sheet from the perspective of the runway it buys you. How many months’ worth of operating expenses are left? Then anticipate a significantly higher cost of capital. Zoom out and try to see the bigger picture: pride or the changing cap table often lose out to fighting to survive another day. Raise more money than you need if you think it’s a good idea to do so. It is preferable to have money in the bank and not need it than the other way around. Cash in the bank is like an umbrella.
As a result, navigating a down round involves a delicate dance in which you must consider not only your own interests but also the interests of both your current and potential new investors. Protecting the ownership of current investors and key employees is crucial because they represent a source of potential future capital and motivation. Overprotection, on the other hand, may result in a lack of interest from new investors due to insufficient ownership or an excessive amount of deadwood on the cap table. What could be worse than a bad round? Two.
Distinguish the signal from the noise even though the headlines are loud.
Finding a way to work alongside the limitations rather than against them is the key to remaining operational during an economic downturn. Short-term liquidity issues can still be resolved without sacrificing long-term growth. Make a commitment to developing more intentionally. To do that, you must first comprehend the basic economics of your company. Control all of your available levers to cut costs and raise cash. And if all of that goes well, you can rely on the investors who have supported you thus far.
Create a plan for the ambiguity of 2023 and position your company for success in any economic environment. To speak with a CFO one-on-one and ask questions about the macroeconomic environment today, your company’s operating strategy, and other topics, schedule a 1:1 CFO Office Hours session.