It seems like everyone’s main goal right now is to sit it out this year; stay alive, and hope for the best. For most businesses, it is to stay alive and strengthen their balance sheets. To be able to achieve that, many companies are raising funds.
Aside from bolstering their financial position, firms are raising capital in anticipation to take advantage of future opportunities that arise after the pandemic. Entrepreneurs are having to be creative when it comes to fundraising during this crisis. Let’s look at the trends in raising funds and some of the challenges businesses face right now.
Be more creative to raise funds
We may be looking at an economic recession for the next one to two years. Many investors are slowing down and taking their time to invest. Those who had money in the secondary markets blew a lot of money after the stock market fell sharply in March, just as coronavirus cases were starting to build up. And even though the market rebounded, investors are careful about getting involved in new deals.
These investors are presently seeking additional data points in the private capital market, in an attempt to determine what is going to take place in the future. Many are in a wait-and-see mode. These times present rough conditions for entrepreneurs who want are looking for investors for their companies. Valuations are being hit and terms will be harder. Investors are naturally seeking more precautionary measures. Businesses will have to be more creative to get their much-needed funds.
Reasons to remain positive
The good news is that investors have $189 billion in cash reserves. This is an enormous amount of cash they are sitting on and could tell us that even though they are taking a more careful approach, investors still have the funds for the right opportunities. Though they do not have to put all this cash to work at once, they do need to distribute them within a given period or face the opportunity cost of inflation.
The stock market has been unstable recently, making investors wary. Startups, on the other hand, have recently seen a 25% discount in valuation, which is very enticing to investors.
In essence, most investors are still in business and are still looking to invest. However, there has been a big drop in the early-stage company investing. Investment opportunities that are based in the U.S. will be prioritized over non-U.S. based companies, as global markets feel even riskier at this stage.
A look at rights offerings
A rights offering is defined as a group of rights offered to current investors to buy more stock shares. An individual investor’s right to buy depends on their current holdings. This offer is good for a specific time frame, usually within a month and at a given price. It is an invitation to buy more shares so that the business can raise more funds. Investors may or may not accept the offer.
Alternatives to VC
If you are trying to raise funds, there are many other options. It is a big plus if you already have been funded before and have collected contacts over the years. Since most meetings are on Zoom right now, it would be difficult for investors to get to know the people they have just met.
Other options include:
- Individual Angels
- Angel groups
- Strategic investors
- The government
Navigation tips through this difficult environment
It is going to be a long and arduous road ahead, but that does not mean we should take 2020 as a lost year. Just be creative with your strategy.
1. Focus on what you can control.
You cannot change the external factors that affect your business, but you can still focus on what you can control. It is time to tighten your belt to cut costs on things like travel and adjust manpower.
2. Create value in your product.
For the same price, you can give your customers something more, even if it means you may have to cut some of your profits. The idea here is to gain their loyalty during the hard times and that you are telling them that you are here for them. Hopefully, when things get better they will remember and reward you with their checkbook.
3. Build relationships with investors
Investors will tell you that they do not invest in people they have just met. They want to know you better, wait, and see if your company will grow and how you are running it. Once they are comfortable enough, then they give you the money. That is why you must start building your relationships early. Many investors are willing to double down on a good thing, so if you have investors you have worked with in the past, this is always the most reliable place to start.
4. Keep In Touch
Your communications should not stop after your first meeting. Send them monthly updates by email. Include a summary of what you do, your recent accomplishments, and even a picture of your team. You can also include a Key Performance Indicator table.
Our current condition requires us to work harder. Companies including Slack, GitHub, and Square were created during a down market and collected their fortunes in the upmarket. There is a great quotation by Walt Disney, “You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you.” Remember that down markets bring with them a chance for reinvention and often opportunities.