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How to Raise Equity Investment During an Economic Crisis

Although Europe will look to have the pandemic under control in the course of this spring, the economic implications are likely to affect businesses for a long time after. 

Having spoken with investors and entrepreneurs, many say that in a crisis, you see the best and worst of behaviour from VCs.  Whilst the strong message from many is that VCs are still open for business, in the last few weeks I’ve seen term sheets being pulled at the last moment and deals stall at a relatively advanced stage. Starting a deal from scratch right now is undoubtedly more of a challenge but for some, it will be unavoidable in order to survive.

Many VCs will have been focused in the last few weeks with looking after their portfolio companies.  I would imagine those portfolio companies are looking at revising budgets, conserving cash and dealing with the reality of extended sales cycles and conversions.  Many portfolio companies may be having to face the harsh reality of furloughing staff and many management teams will be expected to take salary reductions and/or deferrals. 

If you are company looking to raise equity investment, the above probably won’t leave you feeling very positive.  Although undoubtedly tougher to raise capital, the good news is that many VCs will look beyond short-term events.  Deals are very much still happening although more so where there are pre-existing relationships.  Funding capacity in the market is good since VCs in general have healthy pools of dry-powder in funds.  Therefore don’t assume you can’t raise money right now.  Whether you are in the middle of a funding round or about to kick off a new one, here is my list ofkey points to keep in mind during a crisis…

  1. Identify your funding requirements - even in the most buoyant of economic conditions, raising capital can be a long and challenging process. Things may take even longer right now so it is important to identify your funding requirements sooner rather than later. Investors will be interested in how you are dealing with the crisis and you are likely to come under more scrutiny than usual so be prepared to demonstrate how you’ve sought to reduce your cash burn and increase your runway.  Don’t forget to push debtors for payment and take advantage of the government schemes and grants available.
  2. Give yourself enough time to raise money - raising money always takes longer than you think and you need to raise more than you need if that is possible. That message applies now more than ever. Give yourself enough time to raise (at least a good 3 to 6 months) and make sure that the amount you are raising is giving you enough runway.  Raise adequate capital so that you aren’t having to go back to investors, cap in hand, too soon.  Whilst a runway of 24 months may be ambitious for very early stage companies, it may be prudent to be thinking along those lines for more established companies.   
  3. Fundraise from existing shareholders – it is much easier to get existing shareholders to continue to back you by raising more money than it is to seek external funding from a new investor. Have honest conversations with your existing investors and ask them about their appetite for a bridge round.
  4. Valuations - valuations will undoubtedly be affected and most people I’ve spoken with expect there to be a significant dip. That means that you might end up having to accept less money than you’d like and on less favourable terms than you’d like. If it is a choice between survival and the alternative, valuations are not as important as getting money into your business.
  5. Be realistic - investors will classify companies based on whether the pandemic positively (e.g. cyber security, some health tech), neutrally (e.g. some business software) or negatively (e.g. luxury retail, travel, entertainment) impact them. If you are a company which operates in a space which has been negatively impacted by the pandemic, it is unlikely that there will be an appetite from new investors to invest in your business so you may need to get creative when it comes to adapting during the crisis.
  6. Pivot – look at your business plan and projections. If they need to be adjusted, do it. Things are different now and for the most part, you probably can’t do what you expected to be doing.  Be on the lookout for short term opportunities that you can take advantage of.  Proving you can adapt and leverage new opportunities will be favourable in the eyes of investors. 

Looking Ahead

It isn’t all doom and gloom - the best and growing companies will continue to get funded as will those providing solutions in the downturn.  Many new funds have been raised in the last few years and so there is still plenty of VC funding in the market.  The challenge I see for companies is that VCs will deploy that funding slower to maintain reserves and to help existing portfolio companies by making follow-on investments.  The same can be said of Angel Investors and Family Offices who I believe are also less likely to invest in new companies and instead shift focus to their investments in existing portfolio companies.  These comments are my general thoughts – each investor will be different and their analysis will differ depending on their portfolio, where the fund is in its lifecycle, how many challenging situations they are dealing with and how much portfolio triage is needed.

From an investing point of view, the equity market will slow down significantly so I expect to see overall far fewer rounds in 2020 than I’ve seen over the last couple of years.

Many years ago, an old boss told me something that has stuck with me: “People do business with people they like.”  Funding and venture capital is all about people and relationships.  Even with amazing applications like Zoom, you can’t replicate that face-to-face/in person contact which I really believe counts for so much.  However, as we adapt to current circumstances, utilising these applications as part of your fundraise, at least for now, will be key.

It is to be expected that appetite to complete equity investments would drop in the short term as the country and the rest of the world went into urgent lock-down.  Once we have clarity on the relaxation of lock-down restrictions in the UK we expect to see many more investors pressing on with deals.  Things will get back to some sort of normality but in the meantime, we need to embrace the ‘new normal’.

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