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Capital raising for startups in hard times

Embrace your options, rise to the challenge. Focus on long-term sustainability rather than rapid growth. Don’t give up too much capital and choose the right investors.

It’s all about embracing your options and rising to the challenge.

Rob Vickery, founder of Hillfarrance Ventures, suggests embracing your options, but not letting go of your vision. The upheaval caused by the pandemic is just another hurdle in your path and a solid business strategy has got to account for hurdles. Right now, many startups will have to pivot, you might have to as well and that’s okay.

What’s important, however, is to keep things on a low burn for now. Keep your fundamental goals in mind. Try not to stray into sectors you don’t already know just because the market seems to be doing well in that particular area. For instance, if your speciality is fintech, now is not the time to expand into edutech unless of course, it’s a pivot for which your fintech expertise provides a solid point of difference.

Focus on long-term sustainability as opposed to rapid growth.

Rob also suggests that – if you’re going to do a capital raise – raise for 24 months as opposed to the usual 12-18. At the same time, don’t feel as though you need to de-value your product or services with customers in order to keep them. Dig deep with those customers and find creative ways to keep them on board that don’t rely on devaluing your product or service.

Review your company valuation.  It has to be based on revenue – not necessarily the immediate situation – but also it cannot be an irrelevant evaluation that ignores the potential impact of the pandemic on your customer base.  You may be completely wrong about the real value of your company. Being wrong will impact your capital and what you give away to investors.

Rob suggests that –  Covid19 or not – the questions you should always ask yourself before any fundraising run is:  Why you? Why now? Why this VC or investor?

Asking these three simple questions will help you with your business and capital strategy.

Knowing how much you are raising (and from whom) are key things to consider. Here’s a template that Anna Guenther, co-founder of Pledge Me, worked with for her capital planning. Thanks Anna!

Suse Reynolds, Chair of Angel Association of New Zealand, says that Investors are still here for NZ startups. Now more than ever, their decisions with respect to your business will be determined by the way you interact with them, the empathy you show, and how thoroughly you understand their goals and your market.  This means that one-to-one discussions are key, as is clear and honest communication. In short, networking with those in the startup and innovation community is more important than ever AND especially with those who are already working with investors and are linked into that sector of the community. Networking should be at the forefront of your fundraising campaign right now.

And – while you’re fundraising, make sure you are ensuring the best possible relationship and service to your existing customers.  Embrace them, grow closer to them, and understand them better than any of your competitors. These are the angels who will keep your company afloat.  Make sure your reputation stays strong, that you meet your obligations, and keep an eye on that cash flow.

Never forget that as much as we need customers to survive, employees are your real lifeblood.  Be sure to look after them as they will also be anxious. And – finally – be kind to yourself. Now is not the time to demand perfection from yourself.  It’s a weird time and we all need to treat ourselves with care.

Don’t give up too much capital.

In order to keep control of your company, you will need at least a third of your capital. Times may seem scary, but no matter what an investor says, be careful about how much you give away.

How to choose your investor

Suse suggests that If this is your first fundraising run, you should try to choose a local lead investor.  Moreover, choose someone familiar with your sector. Now, more than ever, relationships and clear lines of communication are key.

Keeping the number of investors low will also be beneficial. Companies with lots of investors can be cumbersome to manage. Right now, you want to be nimble, able to make decisions quickly, and with a degree of agency.

‘Vulture capitalists’ (investors who use stressful times to take advantage of startups) have always been present and now, in comparison to 2 months ago, it’s easy to fall prey. As always, be selective and be vigilant. Remember, you are committed to your investors and investors will always be a big influence to your company even after the crisis ends.

Don’t forget there will be more than one round

This may be your first capital raise, but it’s unlikely to be your last.

Your goal shouldn’t be to raise as much capital as possible within a limited time span. In doing this, you run the risk of giving away too much of your company to investors you barely know. As mentioned before, pandemic or otherwise, keeping your business on a slow and healthy burn is key.

If someone asks for equity, in return for a service, then offer cash instead.

Think of the long term. Is it worth trading your company’s capital for a service?

Remember, this situation will end and the service provider could still own a part of your company. So, when possible, pay cash for every service and avoid paying with capital.

Is crowdfunding an option?

Anna Guenther, Founder of PledgeMe, tells us that a lot of campaigns and launches have been postponed or suspended.  Startups and crowd investors are both waiting to see how the situation will evolve. At the same time, while there is less activity (which could well be a good thing for the startup who braves it), projects are still getting funded even if everyone is generally becoming more cautious..

Now is the perfect time to start to prepare your business and capital strategies. Talk to customers and partners. Start to build a relationship with your crowd. Exercise empathy, and try to build personal connections.

Having said that, Anna also warns about overcommunicating.  From inboxes to mailboxes, news feeds, and social feeds – everyone is receiving information regarding Covid-19.  Think carefully about that and then craft an authentic message that will genuinely help your community or demonstrate that you care about them.   How can you support customers and community in a manner that makes them happy to hear from you?

I’m a startup investor, what should I do?

On the surface, now seems a difficult time to be an investor.

Some investors are anxious to keep as much money as they can on hand.

At the same time, others are investing erratically, outside of their specialities, concluding that this period of change is the time to make risky investments.

Other investors are using these stressful times to take advantage of startups, hoping to secure more capital for less.

As mentioned above, Rob names these individuals “vulture investors”. He goes on to say that, as an investor, you don’t want to be one of those individuals; or any of the aforementioned for that matter.

According to Rob, the secret to making it through these uncertain times is to take care of people and to continue on with business as usual as best you can.

Rob suggests embracing possibilities as you normally would but discourages trying to predict where the market’s going to go.  Speculation is seductive and sometimes interesting but it’s important to remember that the current situation is unprecedented.  Its effect on the market will therefore be an out of the box impact. If you are a specialist in a sector, stay there and do what you know how to do already.  There may be some shiny opportunities in other sectors but you are better off sticking to your knitting.

 

P.s. We couldn’t have written this article without the amazing brains of Rob Vickery from Hillfarrance, Suse Reynolds from AANZ and Anna Guenther from PledgeMe. Check out the full webinar live-stream on our Facebook page.