Capital Raising in Current Times

India took decades to convert from job seekers to job creators. Indian and global investors pour money into startups via VC funds, angel networks, venture debt funds. Today, this complete entrepreneurial ecosystem is on the brink of collapse. The young businesses are witnessing an unprecedented situation: the corona virus crisis, the following economic downturn and an expectation of deep recession. This might disrupt the fundamentals of a growing startups which are in constant need of external capital to fuel growth.

Generally, a company starts the fundraising process once every twelve months, ensuring there is still another six months of cash available to close a round of financing. The principles to stay afloat in such times is to Focus on survival and understand these concepts:

• Set your expectation right that the next three months(possibly more) will be very difficult from a capital-raising perspective.
• The desperate need for funds will force startups to raise capital even at lower valuation, ending up in dilution of founder’s equity to existing and new investors. Thus, Optimising runway instead of valuation at this point – a flat round that gives you 12 months’ visibility or seeking debt from banks, angel or alternate investors at market rate or lower interest would be a desirable outcome.
• To keeps the head above water, learn the difference between needs and necessities. Keep expenditure on business development alive but Removal of fixed overheads should be at the top of the list
• Investors should now shift focus from “growth at all costs” to “reasonable growth with a path to profitability”. Adjust your business plan to increase free cashflow by ramping up sales and thus net revenue. Look for encashable expertise or human capital within your startup. Depend on it until your core business is unable to reach its pre-covid heights
• The success in these testing times depends on the company’s agility to respond to this crisis and look for Alternative fundraising avenues, find new revenue lines and preserve cash. Raising funds by pay cut for willing employees and rewarding them with equity , exploring new revenue lines by innovating new opportunities for business
• Opt for Bridge investments if your company will not be able to survive for full 18 months without emergency capital. Start with your existing backers, then reach out to angel syndicates, early stage funds in your network
• Create support groups of founders externally as everyone is in the same boat . Also create strong internal groups with your critical employees to be abreast of their challenges
• Be persistent but patient: Investors could be dealing with situations at their portfolio companies or in their personal lives.

Thus, all founders out there, create new budgets to account for the onset of nuclear winter in the fundraising world, bring expenses down to the bare minimum, and show patience along with courage at this time.

The dilemma that investors are facing in this scenario is baffling too. The existing investors are primarily focusing on preventing loss on the existing portfolio.  The risk profile for them has changed quite significantly due to the:

a) lack of market opportunities for startups- The startup may be highly relevant but the potential clients may take another 12 months to take risk on new product/service. The probability of a start-up’s success will be reduced in such environment. The ones with sufficient cash, recurring business model and sound commercial traction will survive

b) the need to (re)finance and support investor’s own portfolio- No investors shall lookout for new opportunities, financing by the existing investor is a possibility only if he/she still believes in the business

c) the opportunity to  wait it out and invest in the survivors- During an economic downturn, there is less competition to get into deals, and investors who are looking at new deals, are likely to wait and see which companies in their pipeline will survive and how the market will develop.

Summing up the situation from both the investors’ and founders’ end, while the effect of the corona virus seems surreal and opportunities limited, remember that lots of successful companies have been created in downturns. Adversity sometimes brings out the best in us as we move to be as creative and innovative as possible, not to succeed but to survive.