Author: Eslam Darwish, Founder of Just Innovate & VP at Global Ventures
The COVID-19 crisis has triggered an economic downturn reminiscent of the 2001 dot-com bubble burst and the 2008 financial crisis. This is already manifesting in the trillions of dollars lost in global markets, record unemployment rates, and all-time low oil prices. All of which indicate that the recovery will take time; possibly 18-24 months, which startups need to proactively plan for. This new economic reality makes fundraising (an already difficult task), exponentially more challenging for startups.
As young companies begin to think about raising further capital, a few points should be kept in mind:
- Opportunity : The current climate has initiated significant and irreversible changes in customer behaviors in ways that will accelerate technology adoption at unprecedented levels. This creates a huge opportunity for tech startups/emerging technologies to capitalize on, including e-commerce, video communication, fintech and more.
- Mindset: One of the most important determinants of whether or not the start-up will survive the current crisis, is the founders’ mindset and their ability to embrace that this is not only about limiting their challenges, but also challenging their limits.
So yes, there is light at the end of the tunnel, and while it’s advisable to avoid fundraising during the current climate, negative cash-flow is an inherent fact for many venture-backed startups, and raising capital is mission-critical for business continuity.
Top tips founders should consider when fundraising during COVID-19:
1. Embrace the new norm
As it’s not practical to expect that your business will maintain the same momentum it had 2 months ago, and it’s also not practical to expect the same valuation road map you had in mind before the crisis.
This is the time to take a pragmatic look at your business, the new market reality and to calibrate your expectations. It’s important that you don’t get overwhelmed by negative feelings of forced compromise, and that you understand that it simply means that it will take you slightly longer to get to where you wanted to be. Focus on the long-term!
2. Look within
Before raising money, and in order to define your actual cash requirements, you need to implement stringent cash conservation measures. By quantifying the problem, you may be pleasantly surprised that the problem is not as big as it seems. Investors will also be confident, as you’ve demonstrated that you’ve done your homework and are running a tight ship.
Actions to consider:
- Freeze non-essential expenses (travel, hiring, training etc.)
- Delay new investments and market expansion
- Re-negotiate supplier payment terms
- Review 3rd party contractual commitments and exit where possible
- Discount customer long-term contracts / memberships to bring cash forward
- Focus on “quick-win” revenue opportunities
3. Think in smaller bite-sizes
Now that you’ve identified your capital requirements, it’s worth considering breaking it up into smaller bite sizes of 3, 6 and 12 months, so you can:
- Simplify and accelerate the path to capital
- Recalibrate your ask based on how the market evolves (negatively or positively)
4. Navigate the debt toolbox
Before giving up equity, make sure you’ve exhausted all of your debt options, including:
Working capital financing: Used to fund your company’s investment in short-term assets such as accounts receivable and inventory, and to provide liquidity so that your company can fund its day-to-day operations including payroll, overhead and other expenses.
Senior term loan: Allows the borrower to receive the loan proceeds in stages during a 6-12 month interest-only period, and repay the loan over 24-30 equal monthly payments thereafter.
Second lien term loan: Loan is repaid in regular payments over a set period of time. This is similar to a senior term loan, but with a second lien rather than first lien on collateral.
Revenue-based financing (RBF): Repayments are based on a percentage of the borrower’s monthly revenue rather than a fixed amount. The payments fluctuate with financial performance. In the absence of revenue, this loan/line of credit facility can be tied to your accounts receivable and/or inventory to provide a collateral base for the loan.
Mezzanine financing (later stage): This is a hybrid of debt and equity that ranks below senior debt, but above common stock in a capital structure and is usually structured as subordinated debt.
Government subsidies: Check your eligibility for government bailout packages and SME facilities that are being rolled out in the markets in which you operate. This may provide a fast and affordable quick fix.
5. Understand your audience
Once you have decided to raise capital, it’s critical that you put yourself in investors’ shoes and understand what they are looking for. Some things to consider:
Situational assessment: Assess current investors’ mind-sets, appetites and priorities by geography. Appreciate the challenges they are facing, especially with current portfolio companies, but also know that they need to continue to deploy their funds. Also, calibrate your story to match their strategic priorities.
Identify your target: Do your research and create a shortlist of target investors, starting with your current investors who already believe in your team and business and whose objectives and interests are aligned with yours.
Provide reassurance: This is important for new investors. Try to encourage existing investors to show commitment and a willingness to help your company navigate this crisis, irrespective of the absolute investment value.
Make realistic assumptions: Be conservative and pragmatic with your assumptions, including company valuation, market conditions, time to revenue, burn rate and cash runway and time required to close rounds.
Get your priorities straight: This phase is about survival i.e. money in the bank. Be sure not to make the mistake of letting go of a “good enough” deal in pursuit of the “ideal” deal.
6. Pitch perfect
Your pre-crisis pitch can’t be the same as your post-crisis pitch. Things to focus on:
It starts with you
- Investors (including current investors) will be reassessing founders and their teams to gauge their fit to manage the current crisis. It’s about having the right attitude to demonstrate your true leadership, resilience and adaptability.
Re-evaluate your leadership team and surround yourself with people who have complementary experience to yours.
Seek out advisors who have weathered such storms before to guide you through this journey.
Focus on fundamentals
Investors now, more than ever, are laser focused on business model defensibility, so share your business plan before/post the crisis and corresponding assumptions. This will give investors confidence that the plan is well thought through and more importantly demonstrates transparency.
Align on multiple scenarios, a lengthy runway serves as an insurance policy to investors that the company will survive the crisis (the chart below gives an indication as to how a company may ponder their strategic options).
- Demonstrate control of your cost base and showcase the details of how your cost base was structured pre-crisis and how you’ve restructured it post crisis (e.g. evolution of overheards directly linked to revenue, fixed costs, variable costs etc.)
Stand out or be out
The crisis will hit companies without a unique value proposition the hardest. This particularly applies to differentiation through underlying technology. Things to consider in your pitch:
Demonstrate customer understanding and share insights about how customer behaviors are changing, and how your value proposition caters to this new norm.
Highlight technology capability by showcasing your current product and how your development roadmap will evolve to cater to changing customer needs.
Share a pivot strategy if necessary; some industries and sectors will be hit harder than others during this crisis e.g. travel. The question here is whether or not you can leverage your underlying technology to service new industries, markets or opportunities.
Don’t get sidetracked trying to manage an uncontrollable situation, instead simply manage your business! Stay alert for the bounce back, because as with most things in life, this too shall pass and when it does, you and your business need to be ready.
You are more ready than you think to make it through this. This is not optimism but rather based on the fact that startups – unlike larger corporations – are used to bootstrapping and agility, both of which are critical traits to survive this crisis.
Take care of your people; they are your most valuable asset.
And always remember… “Out of clutter, find simplicity. from discord, find harmony. In the middle of difficulty, lies opportunity.” – Albert Einstein