Fundraising is not easy; even when capital is readily available, let alone in a down market. Nevertheless, every challenge views as an opportunity and the same can be said here. It’s important to keep in mind that when the market is down, everybody will have to suffer. But with a bit of knowledge on what to do in these sorts of situations, you can make the most of a bad situation.
That said, a lack of liquidity and IPOs can and will have a tremendously adverse effect on the whole investment ecosystem. That coupled with the late last year’s market volatility, all sorts of retaliatory geopolitical practices, and general global uncertainties about the future, investments are being further affected.
As a consequence, we are seeing a more generalized reluctance in seed investing. Similarly, there are fewer angel investors, and those that do exist will take longer to decide and will usually spend less than usual. There are some tactics and practices that SME founders can do to handle this new environment better.
Becoming Profitable in Adversity
While profitability for a business is an ultimate goal, no matter the circumstances, it can help a great deal in raising capital during a down market. For starters, becoming effective means that you are no longer as dependent on outside money, as before. On a similar note, a profitable startup will be far more attractive to investors if perceived as a less risky investment. It shows that management can and will spend their money responsibly.
So, with that in mind, make profitability your most next milestone, granted you are not profitable already. Build a comprehensive plan that can achieve this through a combination of smart expense reduction, customer base diversification, and a more proactive approach towards digital marketing. All of these examples will provide a stable foundation on which to evolve and attract potential investors.
Slow Down and Grow
Also touching upon the point above, increasing profitability may also involve a fair degree of pacing. Even though it may seem somewhat counterintuitive at first, slowing down to accelerate growth is a viable solution, particularly in a down market. An overwhelming majority of SMEs feel the need to rush things, thinking that’s the only sustainable way to get ahead. Unfortunately, this can lead to rash decisions, uncalculated risks, and less time spent on quality.
Companies need to determine when it’s time to speed things up and when it’s better to slow down. The acceleration at which a business needs to grow, under normal circumstances, is when there’s no sacrifice made to the quality of their product and service. In a down market, aggressive expansion may not be a wise choice.
Aim For Less
In many cases, founders ask for a round figure when trying to raise capital, say, something around 750k, instead of the exact sum they need. In a down market, this may not be such a wise strategy. Try, instead, to work on your financial model and re-work your budget and look at what things you can cut out.
You could consider investing in some form of automation and hire fewer people. For some businesses, it’s also possible to renounce on a brick-and-mortar office and opt for a virtual office, instead. Flesh out your marketing strategy but focus your efforts on platforms that generate the most ROI. By trimming your budget wisely, you can present your investors with a financial model that requires 330k, not the 750k you were initially going to request.
Your Fundraising Funnel Changes in a Down Market – Adapt
When the market takes a downward turn, the fundraising funnel goes through some changes of its own. Firstly, it becomes longer, meaning that it will require more meetings and extra time with every investor. So, if it usually takes around two to three sessions before a check is granted. In a down market, this can extend to as many as five or six. Secondly, there will be more investors at every stage of the process that will deny you.
But this is a numbers game, after all. To improve your odds, you will have to double, if not, triple the number of investors at the top of the funnel. However, it doesn’t mean that you should consider any investor out there. Do your research and look for qualified investors that have the necessary capital, are interested in you, and haven’t already invested in your competitors.
Your Founder-Market Fit
In a down market, all stakes and investor expectations are higher. Not only are they looking for a better deal but they’re also interested in an inspirational vision and a person/team to see it through. It is where the founder-market fit comes in. It stands for the founder’s abilities to solve specific problems in their respective market.
The best example of this is the founder’s and the team’s almost innate understanding of the target audience. It’s about their ability to relate to and empathize with potential customers to build a product that indeed works with the people it’s intended for. Such a trait, however, usually comes from years of experience and from people that have experienced those problems first hand.
It is a lack of a founder-market fit that is among the main reasons why startups fail within their first year – and most investors know it. Teams will have to invest too much of their limited time and resources in learning about the industry and the customers’ pain points. Put together a team that fits into this category, as it will get you a long way on more fronts than one.
Cash Flow and Analytics
Most entrepreneurs are so busy with their sales, gross margins, and expenses that they at times forget all about cash flow. Without a proper cash flow management plan, your firm will not hope to survive over the long term, let alone raise capital in a down market. It is right in spite of having steady sales or reporting profits.
On a somewhat similar note, entrepreneurs need to use analytics, not their gut to make decisions. It’s easy to stick to what works, but once it doesn’t, most don’t know what to do, and that’s when businesses fail. You need to be aware of the warning signs and evolve your practices well before the change is upon you. \by showing your investors, you have an ear always to the ground will entice them more than if you’re going by feeling alone.
Raising capital in a down market will be more difficult, there’s no denying it, but it’s nowhere near to being an impossibility. Take this, otherwise, sad situation and spin it in your favor by building a more versatile and self-sufficient business with a solid foundation that can withstand the adversities of an uncertain future.