Fundraising in the best of times is difficult, but raising capital in a down market or recession often seems impossible. Despite venture “dry powder” being at record high levels, startups and rapidly growing companies seeking to scale their businesses in the near term should understand that venture funding is much more “discretionary” and often comes at a much lower valuation than expected. But with every crisis comes opportunity, and investors are still seeking to diversify their portfolios and invest in solid investment opportunities despite the volatile markets.
As a result, investors will continue to look for companies with solid financial foundations that can demonstrate they have defined strategies to maintain growth rates and cash runways within their markets. So, what strategies can such companies deploy to improve their ability to raise financing?
Prepare for Opportunities, Be Proactive, and Extend the Runway
Understanding how your business sector is likely to fare during an economic downturn is crucial. If the company is in a more vulnerable market, it may need to adjust its fundraising strategy accordingly. During economic turbulence, it’s prudent to “hope for the best but prepare for the worst.”
Raising cash via debt or equity always takes longer than expected. As such, one must start thinking about fundraising earlier and perhaps aim to raise more debt or capital than the company immediately needs to provide a financial safety net. Trading equity dilution for additional cash amid market uncertainty is not a bad trade-off. Extending the cash runway is often essential for survival.
In parallel with fundraising efforts, management should immediately focus on vigorously implementing cost-saving measures and ways to streamline operations and productivity. Do not assume the company can simply grow the business’ topline out of a hostile economic environment. Maintaining sales growth is obviously crucial, but it is imperative that the optimum cost base for the business is addressed in tandem. Consider all methods of raising cash or extending the runway in parallel to equity fundraising, including obtaining debt (bank, convertible, “revenue financing,” factoring) combined with cost savings initiatives.
It is also helpful to take a hard look at headcount levels (both existing and projected), given that people costs are usually 50% to 60% of fixed monthly cash burn. Also, evaluate costs in nonessential areas (expenses that the business can function without if forced to cut) and capital expenditure projects with extended cash paybacks. Be proactive and analyze these expenses, maintaining a rigorous and frequent focus on cash flow, planning, and projections.
When it comes to investors, a company often only has one chance to impress and convince. As such, the fundraising process needs to be investor friendly. Have a concise, compelling, and well-rehearsed pitch deck highlighting senior management, the growth story, evidence of delivery, and a clear plan for the use of proceeds. Prepare and populate a comprehensive and user-friendly virtual data room anticipating potential investors’ due diligence asks and requirements. If possible, prepare a draft term sheet and financing agreement in advance.
Finding strategic or financial investors who understand the business and market and can add real value in terms of sales, partnerships, and future investment leads is ideal.
Focus initially on finding a cornerstone or anchor investor to lead the financing. Filling out the round later is often easier once a credible investor has established and agreed on the valuation and investment terms. Incentivize the lead investor with a board or advisory seat and favorable terms if required.
It is also important that the company‘s recent investors re-invest in the current fundraising (even if minor). This is a “seal of approval” and is critical for new investors to see. Consider engaging third parties to assist in the fundraising (existing investors and board directors, placement agents, “friends and family,” press, etc.), but ensure that the process is well-coordinated and managed by the company.
Finding strategic or financial investors who understand the business and market and can add real value in terms of sales, partnerships, and future investment leads is ideal. Credible “name brand” investors also help fill the existing financing round and future fundraising efforts.
Chris Roling is chief financial officer of Coinme.