There seems to be a pretty unanimous view that ‘winter is on its way with regards to the economy and the fundraising markets.
The public markets have already reacted to overvalued tech stocks and the private markets have started to follow suit. Private Equity houses are closing their doors to new funding, and it won’t be long before this trickles down the complete fundraising hierarchy. Even seed investors will be starting to think twice before committing.
To a start-up/ early-stage business market that has been conditioned to both building their businesses and being able to raise funding as a straightforward process, it is going to come as a shock when doors are closed and there are a lot of people saying no.
My view on all the most successful fundraising processes is that preparation is the key. You can never over-prepare, and you can never prepare too early. Preparing for a difficult phase is often harder but getting it done early will help a lot.
Here are a few things to think about when preparing for difficult times:
Look at running a break-even budget
What would it take to not look for more investment money at all? In most young businesses there is a break-even running rate that can be found. It might mean slower growth, some tough people decisions, not making some key hires, and salary sacrifices. But it will also mean survival, control, and a future.
Look to raise less
You need to buy some time. If you really do have to raise money, then look to raise less. The difficult times will not last forever but buying yourself six to twelve months could get you through to a warmer market. Time will give you the option to reshape your strategy and for the business, it will mean a lower dilution even if the raise is at a low valuation.
Talk to your current shareholders
Linked to the point above, if you are looking to raise less or you have abandoned the big raise, see what you can raise from your current investors. If your planned raise was a big one, they might not have been interested, but might be very happy to get involved in an interim, or bridging, raise. Offer them a very good deal – they have stood by you, and it looks very good to future investors that the current investors believe in the business and have supported you through difficult times.
Take a loan
This will not work for everyone but could work for some. If the business is doing well and has some assets you might well be able to raise a loan from places such as a bank, a venture debt company, one of the government backed funds or even an individual who might find the interest rate very attractive. Be prepared to pay a high-interest rate. On the plus side, it’s non-dilutive and could be a very good short-term way out of a difficult time, providing you can afford to make the repayments in the near future.
Look for a trade partner
Is there someone else in the sector or close to the sector in a similar position or with a stronger financial position than you could merge with or become part of their group? You could hang on to autonomy and control of the day-to-day running of the business and secure funding to get you through.
Look after your future
If you are caught in a position of having no other option than doing a deal at a low valuation and maybe even having to give up control of your business, then there are a couple of things to think about:
- Is it worth continuing? Not all businesses are successful. Sometimes calling time is the right thing to do. I have never met a founder who doesn’t believe they have a future or wants to give up but grinding away in a miserable environment effectively working for someone else can have such a negative effect that a clean start elsewhere might be the answer.
- If you do have to do this type of deal and you decide to carry on, then make sure that the deal put in place rewards you and the management team if there is a future success. Most investors want a motivated management team and whilst they will take advantage of your need for finance in the short term, they will want you to turn up every day wanting to succeed. If you do well then they will as well.
How a business weathers difficult times is always a very good barometer of how good that business is and that management team are. One thing I have learned and experienced first-hand is that management teams always learn more in testing times. It looks like a testing time is coming, so be prepared.
David Pattison is a start-up funding expert, business chair and mentor, and author of The Money Train: 10 Things Young Businesses Need to Know About Investors. The book won the Best Startup / Scaleup book at the Business Book Awards 2022.
