Want to raise funds during a bear market? Here's how
July 04, 2022
Rising interest rates. The tech rout. Market instability. Stagflation or inflation? It depends on who you ask. For Founders, raising start-up funding just became a lot more complicated.
The pandemic, followed by a supply chain crisis, increased prices for fuel, raw materials and basic necessities. Now, a series of geopolitical crises have driven widespread uncertainty about the global economic outlook. This, in turn, has made bankers, public equity brokers and private investors increasingly skittish.
The era of easy and (relatively) free money may be over, but investors are still out there, and start-up funds are still available. It is a different game today than it was six months ago, but one that is still well worth playing. If you're looking to raise funds for your start-up, here's how to do it.
The current start-up funding climate for Founders
Just a few months ago, Founders could easily and quickly access start-up funding. In fact, venture capital investment in global start-ups in 2021 nearly doubled 2020 investments. However, those days, while not entirely gone, are definitely less heady. Far fewer start-ups are weighing multiple options for funding. Multiple add-on rounds and 100x valuations are also seeming like a too-distant dream.
Global venture funding dropped to $160 billion in Q1 2022, a 13% drop from the $184 billion entrepreneurs raised in the final quarter of 2021, according to Crunchbase. However, despite this somewhat gloomy data, Crunchbase analysts also point out that while the venture funding market in Q1 2022 was not as strong as the three previous quarters, it is on par with the first quarter of 2021. They suggest that this trend does not indicate a decline to pre-2021 in the amount invested.
That's the good news.
While KMPG expects the venture capital market to remain steady, they also warn that deal-making will slow down significantly while investors focus more closely on due diligence. The consulting firm also believes these investors will focus on late-stage financing, freezing out start-ups and staying away from initial funding rounds.
Here are the eight strategies you can take to attract initial investment and secure funding, including eCommerce funding.
Hold on to your equity
If you do secure funding, hold on to your equity. For Founders, equity retention translates to increased power and control, but more importantly, it is leverage they can use in later funding rounds. This can be critical in getting another round of financing to get through difficult times or scale your company when it's ready. Retaining your equity means stability for you and your business. Remember that you are not just positioning your company to survive the current economic climate. You also want to position it to be ready to take advantage when the economy turns around, as it inevitably will.
In 2022, savvier business leaders are likely to opt for revenue-based financing over traditional financing methods, according to Michele Romanow, president and co-founder of Clearco.
“Revenue based financing is often a far more compelling proposition for Founders than venture capital or business loans,”
- Michele Romanow
“Because, primarily, Founders get to keep full ownership of their business rather than giving up equity—as is the case with venture capital—and there is no risk of default as there is with a loan.” she says.
Michele first explored RBF after joining the Canadian network series Dragon’s Den in 2015. From there, she saw an opportunity to launch Clearco the same year.
Focus on your finances
If financial markets begin to tighten for start-ups, the bottom line will matter more than it ever has. Potential investors will likely focus a lot more on profitability than they have in the recent past. Companies should be in a position to show a clear path to profitability far sooner than has been the norm for the past few years. Investors will be looking for strong bottom lines and companies with both market share and clear revenue.
These are the hard lessons learned by Founders in the recent IPO rout. According to EY, global IPO deals dropped by 37% and 51% in proceeds year over year. It's no longer enough for IPOs to have a great story or tout future profitability. The same is also true for eCommerce funding. In a tight market, investors are simply not going to take chances. Founders need to make it easy for investors to make an offer, which means offering what amounts to a sure thing.
Cash flow, profit and loss and other statements are also likely to receive far more scrutiny than in the past. Be sure your books are accurate and up-to-date and tell a corporate story of profitability and potential. But above all, you must show a strong cash flow.
If your finances don't make the cut, you may have to make cuts yourself, particularly if you have no quick way to grow revenue. Take a hard look at where you are spending. Are all of your expenses necessary? Probably not.
Cut out the extras and stick with what you really need. Consider job cuts and hiring freezes. Labour costs are expensive, so you may have to pare your workforce to include only those you need to run the business. For those you want to keep, boost your retention rates. Replacing employees is costly. Look at projects, research and development and marketing. Are there areas where you can make additional cuts? Consider leasing rather than buying.
Slow your burn rate
This one is related to general tightening and expenses. If you've already been through one financing round, be wary of your burn rate. The burn rate is the pace a start-up spends capital before generating positive cash flow, and if it is high, it can serve as a potential red flag for other investors. Too many start-ups burn through initial funding quickly, using it for business areas that don't affect profitability. Use funding for necessities or to produce products. Even better, keep it as a cash reserve to help you get through any possible lean times ahead.
Extend your runway
Typically, start-ups have been advised to keep enough cash on hand to get through at least six months. But that was then. Now experts recommend start-ups extend their runways to at least two years or more. Your runway measures how many months your business can keep operating before it's out of money.
Unless you have secured funding to get you through the lean times, there are only two ways to extend your runway – build more revenue or reduce expenses. Ideally, you want to leverage your runway to get to something called default alive, where your revenue is enough to cover expenses before your cash runs out.
Valuation looks a lot different in the current climate. The conversations around eCommerce financing today will focus on today's profits rather than your future potential. Look at your growth rate and your expectations for growth. Consider ways you can grow your revenue, but not at any cost. Investors like evidence of revenue growth, but only if expenses don't render that increase negligible.
Offer investors a strong value proposition that focuses on decreased costs, increased growth and a strong cash flow. Investors want to know that a company can survive on its own if it has to.
Have a Plan B
Do not count on a second round of funding to pull you through; don't count on one to position you for the next economic upturn. Adjust your expectations. Investments may take longer. Valuations could be far lower. Look at your options. Does it make sense to bring in a partner? Should you consider merging with another company? Have a plan, then create a contingency plan if your Plan A doesn't work out.
Above all, move quickly
The companies that respond quickly and adapt rapidly to the current economic circumstances are the ones most likely to survive. The sooner your finances are in good shape, the better. A lean, tight ship is far more likely to weather this storm. And if you're in the middle of negotiations for financing, finish them quickly. It may be some time before the investor market recovers. Securing additional funding can help a start-up survive a volatile market and uncertain economic times. If you are lucky enough to be in that position, take advantage of it.
Some of the most profitable start-up companies in the world were born during recessions and darker economic times. These firms have proven they can survive even in challenging times. They're also most likely to take off when the economy and funding bounce back.
Capital is more difficult to obtain and becoming more expensive due to federal rate increases. Clearco is empowering Founders worldwide with the funding they need to grow their businesses. Get funding at the best price while you can.
Thinking about taking equity-free funding for your business?
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