Fundraising in uncertain times: Practical steps

COVID-19 has undoubtedly transformed the fabric of how we live, work, and run our businesses. With recent talk about an anticipated slowdown in venture capital investment, here is our perspective on fundraising in uncertain times.

Extensive flexibility and additional work from the founders

Due to a number of factors, fundraising during a recession calls for extensive flexibility and additional work from the founders. Firstly, you'll find there is an abundance of increased competition. This is largely because there is an increasing number of businesses looking to raise money: besides the 'business as usual' startups raising capital, there are also a number of businesses that have found themselves accelerating their timelines because of poor prospects and unpredictably worse performances. This, coupled with the fact that founders are looking to raise more money than usual — prior to March, companies were raising funds to cover a 12-18 months runway, it has now been increased to 18-24 months — undoubtedly makes for a trickier climate for founders. 

The next hurdle founders need to consider is the decreased likelihood of raising capital from new investors. Investors are setting aside more money than usual to fund the startups they've already invested in, which means less capital  - and potentially some holding off - for providing funds for new ventures. It's a strategy that helps investors limit risk of failure of the businesses they already invested in, as investors are not immune to the volatility and unpredictability of the crisis for their own fundraising.

It's also worth noting that, rightly or wrongly, these past few months offered investors a unique opportunity for due diligence to help assess companies' leaderships, as well as the endurance and potential of the executives.

What's the best way to overcome these barriers?

While it's indeed challenging, it can be addressed with clarity and a bit of extra homework. To start with, you need to focus on strengthening your business in the short-term, ensuring you have enough working capital to get you through the tougher months. You will also need to accept compromises, especially when it comes to valuation or other financial preferences you may feel resolute about. 

In terms of the amount of money to go out for, you need to set realistic goals. How much money will you need to last you through the entire period? If in doubt, go for the higher amount. You don’t want to underestimate that amount and take the additional risk to run short! If the amount you need is more than investors are willing to offer you right now, it's a good idea to offer an agreement on milestones that would help unlock the second part of your money raised. If that doesn't work, you can consider breaking down your fundraising between today... and once again when you reach the next milestones.

However, a word of caution: doing this means you'll find yourself in an incessant state of fundraising, which will need to be factored into your operational plan. In order to focus and deliver on the milestones you need to achieve, you'll need a reliable team that works well without your involvement in the day-to-day activities. While this is a good alternative to accelerate a closing - or failing to raise any money at all - it certainly does add to the existing stress of the team. We’d caution you against considering this option if your only concern with Term Sheets received are about valuation.

While all of this is undoubtedly painful, especially if you're faced with a flat round, you shouldn't take it too personally. You don't control the market, and surviving cash revenue dips has to be at the top of your agenda. As the market slowly recovers, valuations, too, will recover. And, once the worst of the crisis is over, demonstrating how well you handled your business during a recession and how you overcame unprecedented challenges will serve as testimony to your excellent leadership.

Once you have a clear vision on what you're after, you need to go above and beyond the usual expectations required for fundraising. For instance, add an additional section to your investor pitch deck, one that directly addresses coronavirus' impact on your business. Use these slides as an opportunity to demonstrate how well you adapted to what you've had to learn in such a short amount of time, the accelerated timelines you may have had to face, the decisions you had to take, as well as any results you're able to demonstrate. Not only is this is a great way to illustrate your decisiveness and effectiveness when it comes to embracing change, but it's also a unique opportunity to show how you've reflected on what you can do differently.

Having added flexibility when it comes to your financial model is also imperative. You need to be hypothesising on various scenarios regarding what the future might look like, while explaining what underpins your predictions and how you intend to react in said scenarios. Once again, this serves as an unparalleled opportunity to convince investors that you truly hold a deep understanding of your business, and are ultimately capable of executing your plans even during highly uncertain times.

Making the extra work… work for you!

Knowing that Due Diligence will take extra efforts (& time!) due to the increased uncertainty in the economy, we recommend you shift the narrative and view this stage not as a necessity "before closing" but as an opportunity to "accelerate closing". You do this by doubling-down on the good practices: anticipate the Q&A (even more than in normal times) and prepare detailed analysis to back-up your answers. Aim to impress investors (or your Board!) with fast answers that are well thought-through. The more prepared you are, the more you can use every interaction with the investors/Board to make strategic highlights and demonstrate why they should invest in your Business and your team!

While times are undeniably tough, stressful and uncertain, they also offer opportunities in business, just as they do in funding. If you're clear and concise on what you need, roll-up your sleeves, and go the extra mile — you'll reach your fundraising goals, COVID-19 notwithstanding. 

If you need help or advice on handling any aspect of your prospected fundraising, let’s discuss!