Finances & Fundraising
5 Tips for Fundraising in a Downturn

5 Tips for Fundraising in a Downturn

Written by 
Pilot Team
December 28, 2022
5 Tips for Fundraising in a Downturn

For many companies, the wind has been at their backs for the last decade-plus. Raising a lot of capital in a little time was attainable. However, with the state of the current macroeconomic climate, it would appear that heading into 2023, the opposite is true. As interest rates of financial institutions begin to rise and consumption patterns begin to change, startups looking to secure capital are finding it challenging to do so. But it’s not impossible. 

The terms “fundraising” and “downturn” may seem counterintuitive to use in the same sentence. Yet it’s important to remember that in the same way businesses are reducing costs and analyzing spend, so are investors. They’re not putting a pause on investments; they’re merely being more selective about which companies to invest in and how much. This means the rules of engagement have changed for both parties.

To get a better understanding of how to increase your chances of success for fundraising in a downturn, we spoke to MaC Venture Capital Co-Founder & Managing General Partner, Marlon Nichols, Pilot CEO, Waseem Daher, and Purlin Co. Founder & CEO, Giorgi Chigogidze (who just raised his seed round in the current downturn). Here are their top 5 tips on how to raise capital amidst current market conditions. 

1. Do not wait it out. 

It might be tempting to put your business into stasis and reemerge when the macroeconomic environment improves. But it’s crucial to fight against that inclination. Remember that investors want to put their capital to work where they think they’ll see growth and progress. If there’s no movement within your startup for a year or two, they will find it difficult to believe that the year(s) after a downturn will be any different. Investors will eventually start to back away and it will be challenging to secure new ones. 

Rather than hibernating during a downturn, understand what you need for your business to thrive and move forward. The message here is not to cut all spend; rather, be smart about the spend you cut and don’t neglect your long-term investments. It’s fine to reduce burn, but don’t grind things to a halt altogether. Find the important bets to make to keep growing and improve profitability–a large part of which includes fundraising. You need to invest deeply in the core engine that causes your business to grow.

2. Begin fundraising sooner and explore your options.

Due to the rapidly changing economic landscape, the fundraising process is taking longer than usual. The rule of thumb was to begin fundraising with at least 6 months of runway; however, that has now increased to approximately 12 months. So start fundraising before you think you need to. 

Additionally, remember to explore your financing options. For example, venture debt is growing in popularity with early stage founders and can be a viable option since it offers financing to promising companies that are not cash flow positive–as long as it shows strong potential for growth. Other alternative sources could come in the form of structured equity deals, i.e., equity deals with non-standard clauses, convertible debt, SAFEs, and revenue-based financing.

There is a spectrum of financing options nowadays, but picking the appropriate one will depend on your business’ unique situation, financial goals, and how you want to mold your cap table. 

3. Make it easy for investors to say ‘yes’. 

Understand your investors

As intimidating as this market shift is for entrepreneurs, the same goes for their investors. So put a little bit of effort and empathy into understanding what the position of your investor is. Discover their fears and hesitancies. When you know what’s holding them back from investing, you can develop a strategy that addresses all of those worries. The better you know your investor, the easier it is to alleviate their fears.

Get your back office in order

Keep your house clean before inviting company over. Investors want to know that you’re focusing on growth, product, and market penetration; not on managing your back office. Make sure you have dedicated professionals managing your bookkeeping, accounting, taxes, and strategic finance consulting. A clean, well-maintained back office will set the stage for investors if they have clear visibility of your financial health.

Calculate your funding needs

Clearly present what your business goals are and how much funding you’ll need to achieve those goals. By providing a breakdown of how the requested amount will fuel your business forward, you take a majority of the work off the investors’ plates. Coming to them with a detailed plan also shows that you know your business well and are seriously committed to delivering on your promise(s). 

4. Cash is more scarce. Think critically about ROI.

Prepare your business for all scenarios. In the event that fundraising is stalled or delayed, ensure that you’re taking proactive measures to hold your business over in the meantime. While reducing operating expenses is one side of the equation, the other is utilizing tactics and strategy to secure positive outcomes. There are two ways to do this. 

Increase Cash Flow

First, increase your cash flow. Here are four things you can do to put more cash in the bank:

  1. Increase revenue by selling more to more people, or selling more to your existing customer base.
  2. Increase gross margins by selling in a more-efficient way.
  3. Improve payment terms, or get more of your customers to pay upfront or to prepay quarterly or annually.
  4. And last, decrease costs, or cut expenses you can live without.

For most businesses, there isn’t a silver bullet. Controlling everything you can to boost cash flow means pulling all four levers in parallel.

Focus on Key Metrics

Secondly, focus on key metrics for investments and recurring revenue, such as the following:

  1. Know your burn rate
  2. Know your forecasted burn rate
  3. Figure out how much cash runway you have

For example, if you have less than 18 months of runway, you need to secure additional funding or reduce burn significantly. Make sure your executive team understands all the options for increasing runway and what tradeoffs those imply.

If you’re mid-fundraise, close your round as soon as possible. And if you can’t raise money now, be sure you understand what you need to achieve to unlock your next fundraise, such as launching your product, reaching $10M of annual revenue, or getting your burn rate multiple under 1.5X. 

5. Allow your current investors to provide support.

As a founder, it’s easy to feel like the world’s on your shoulders in turbulent times. Your investors, though, have a responsibility to help you navigate them. Don’t forget that fundraising doesn’t have to involve obtaining new investors. Work with your current ones to see where they can provide support. 

Investors often lead a large majority of the investments they participate in–up to 90%. They understand that with this participation comes responsibility. If your company continues to deliver on its promises and is still creating value in a downturn, they will be compelled to take the reins and lead follow-on funding. Investors don’t want to see a solid company go out of business just because the market is having a blip. Positive contribution margins and increased profitability is key for weathering tough times. The more you do this, the more your partners will help you bridge the gap. 

Therefore, it’s important to have a firm grasp on your fundamentals — like unit economics. If long-term growth means a short-term raise, they’ll help you get there. 

6. Bonus Tip: Remember that down rounds don’t mean death.

Many founders have had the luxury of a bull market for the last decade–a time when stock prices were rising and market sentiment was optimistic. Their lived experience has largely consisted of increasing capital availability and lots of cash flow. As a result, they’ve never needed to navigate down rounds before. While economic downturns aren’t always the most pleasant situation to be in, keep in mind that they’re better than the alternative: death. 

So view any term sheet through the lens of the runway it buys you. Only have a few months left of operating expenses left? Then expect the cost of capital to be much higher. Zoom out and try to see the bigger picture: fighting to live another day often outweighs pride or the changing cap table. If you feel it’s wise to raise money, then raise more than you need. Cash in the bank is like an umbrella — it’s better to have it and not need it than the other way around. 

Consequently, navigating a down round is a delicate dance that requires you to balance not just your own interests, but those of your existing and new investors. Maintaining a healthy relationship with existing investors and key personnel is vital as a source of potential future capital and motivation, so protecting their ownership is important. However, overprotection by not discounting the current valuation enough may lead to disinterest from new investors due to limited ownership or excessive deadwood on the cap table. What’s worse than one down round? Two.

While the headlines are loud, separate the signal from the noise.

An economic downturn is not synonymous with ceasing to exist; it’s all about finding a way to operate in conjunction with the constraints instead of against them. You can still solve short-term liquidity problems without compromising long-term growth. Commit to growing in a more-intentional way. That starts by understanding the foundational economics of your business. Then, control all the levers you have to reduce expenses and increase cash. And, if you do all that well, then lean on your investors who have helped you so far.

Prepare for the uncertainty of 2023 and set your business up for success in any economic climate. Book a 1:1 CFO Office Hours session where you can connect with a CFO to ask questions about the current macroeconomic conditions, your company's operating strategy, and more.

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