Fundraising during tough times

BY Diana Dorahy | June 25, 2020

Category : Funding

Whether you’re a Covid-benefit business or one that’s trying to keep afloat at this time, 2020 is definitely a year for action despite the fact we’ve all been told to isolate. Contrary to the popular myth that funds dry up during a crisis, many investors actually increase their appetite during down times whether it’s backing a crisis-born idea or even a valuation play. So, this year is a perfect time to review your fundraising efforts so far and/or carve out a future raise action plan but where do you start? 

Review your current activities

First up, review your existing activities and current financials. You can’t apply for any type of funding unless your books are in order. Andrew Barclay from Stepping Stone says you must create a cash flow scenario analysis to understand the different types of impacts on the business. These include revenue decreases, changes in exchange rates, additional growth in one revenue line, potential to cut costs and revising operating outgoings such as rent.

Really examine all your revenue streams and costs and plan out how to manage against them. It’s only after you’ve done a full review and analysis of your business that you can identify cost-saving gaps. Consider this step one in your fundamentals check. 

When we talk about financial fundamentals we also need to consider how much runway your business has going forward. This is also critical in deciding what kind of funding you need during a crisis. The Genome Startups Covid-19 survey found that 41% of startups globally have less than three months of runway and 65% of all companies including 34% of SeriesA+ startups, have less than six months of runway. Strategy lead at Next Chapter Raise, Amanda Williams says obviously, runway needs depend on what kind of business you have, the size of your payroll and variable costs but as a rule, if you drop below six months, you’ll need a flexible spending plan and/or short term finance. 

Business cash flow is influenced by market conditions but demonstrating your ability to manage this when times are tough, helps when applying for funds, whether a bank loan, a grant or even a family and friends investment. Having an adequate runway is crisis management in action – it says to an investor, you can plan ahead.

Is there room to pivot?

Another way businesses can manage change is by looking at ways to pivot. But how is this achieved? First up, identify your core business strengths. Can they be leveraged in new ways to capture the needs of a crisis market? In the case of Covid-19, products and services targeting people working from home. But building a case for such a pivot will be critical to investors. What is the shelf life of this idea? Does need for it go beyond the crisis period or is it something that is dependent on a short to medium term change in habit. If you’ve designed a new cloud storage service, that could be of significant value to companies whose staff are now working from home but what happens when that workforce returns to the office? Assessing this kind of value in future cash flow and investment terms will be critical in any kind of funding application. 

During times of crisis, investors want to see three things; diversification, flexibility and resilience. They don’t want someone who is so wedded to the perfect vision of their business that they’re unable to make changes when times are tough. They want to see diversification as that helps spread and limit risk. In business terms that means adding more revenue channels and/or trying to capture a different customer or vertical. In making these kinds of crisis inroads, you’ve demonstrated that you’re flexible and that your business is resilient – two very fundable traits. 

One thing to keep in mind when considering a pivot is maintaining your brand integrity. A new revenue stream is all well and good but if it dilutes your brand then that can impose a risk to future funding. Investors are looking for a cohesive story about your company and your USP as well as evidence that any additional ideas are seamlessly integrated into your growth plans. For example, if you have a healthcare app and want to diversify by manufacturing or distributing face masks during a pandemic, you better have an app tie-in and/or demonstrate an ability to significantly grow your user base/mailing list. Otherwise, it’s like a hastily built extension that makes your character-filled house look cheap and nasty. 

Rejig your valuation

Whether you’ve just started out on your funding journey or are looking to do a next round, you must rejig your valuation because it will have changed this year. If you’re a Covid-benefit business, that valuation will be going up and conversely, if you’ve had to shut doors and can’t pivot to online supply or take advantage in another way, your valuation will have decreased. 

Now, valuation is probably the last thing on your mind when cash flow has ceased, and all you want to do is keep the lights on. But, as a longer play that’s attractive to investors and maintains your equity, valuation has to be kept front and centre. One way to preserve your valuation during tough times is through a bridge round. Bridge funding or bridge financing is a short-term capital injection designed to cover immediate expenses until a long-term funding solution is found.  

There are plenty of pros and cons with bridge funding but if it’s the difference between staying open or folding, it needs to be considered. One of the potential downsides to bridge funding is  the impact on a company’s valuation. A founder may have to negotiate a lower valuation and a higher loss of equity because of the nature of the raise. When you need money in a hurry, sacrifices sometimes need to be made. But, in order to preserve as much equity as you can, lower the raise to the amount needed to get through the crisis. Save the larger raise for future rounds when valuation has rebounded.

So, where do you find bridge funding? If you’ve already completed a raise, go back to your current investors. After all, they’ve invested in your business already, a clear support for you and your idea. If you haven’t completed a raise yet, the fastest and most obvious way is through angel financing so start with a family, friends and acquaintances round. What you’re really looking for is a partner who can help you though to the next raise so choose carefully. It should be both a funding and values fit otherwise it just becomes a relationship based on the bottom line. 

Look for crisis funding

Yes, there’s been a slowdown in investment but there’s still capital out there you just have to know how and where to find it. Regardless of whether you’re cash flow positive or negative in this period, there are funding options available, including ones that are skewed to helping businesses get through the crisis. 

In Hong Kong alone, there are a myriad of government grants for SME and startups including:

TVP  – Technology Voucher Programme 

BUD – Dedicated Fund on Branding, Upgrading and Domestic Sales 

D-Biz – Distance Business Programme

Some of these grants are being handed out within weeks of a successful application so it’s worth taking the time to investigate the timing, requirements and “catches” of each scheme. These grants include everything from upgrading your cloud storage solutions or rebranding your business to low interest loans.

Nicole Graham from Bauhinia Solutions says it’s also important to do longer term grant planning to facilitate business growth. This takes into consideration the longer term approval process for  certain grants as well as the rollout time to implement strategic changes such as an IT upgrade.

Leveraging her experience in consulting clients about grant applications, Nicole advises to start off by mapping which grants are available against your strategic business goals. Then, it’s about understanding where to apply and how much you can apply for. If budget allows, consider using application experts as they’ll be able to save you time and money in getting your grant application in and approved.

Knowledge breeds confidence 

Just as it’s important to increase your content and communications with your clients and/or customers, it’s equally critical to update your investors. What do they say? Knowledge breeds confidence. And don’t wait for them to reach out and ask for news either, start the conversation early and be clear on your position.

Investors want proactive partners. You’ll want to show what you’ve done to safeguard your business during this time as well as a list of the changes you’ve made. You’ll also want to demonstrate worst-case scenarios – investors need to see how this could play out. Remember, this is a time when you want to deepen your investor relationship. 

Besides a traditional capital investment, there are other ways an investor can provide financial help during a crisis such as a short term loan with favorable rates. They can also offer invoice factoring where the investor will lend against the value of a signed client agreement. Don’t be afraid to ask your investor for practical help too. That could be leveraging their network or providing customer recommendations.

Bottom line, don’t keep your investors in the dark. Be on the front foot about the state of your business and ask for help. Be honest about where you’re at and be conscious of ways to demonstrate diversity, flexibility and resilience.

Crisis periods can offer golden opportunities to revise your business and fundraising position. Carving out a future funding plan should begin with a complete revision of your current business activities and financials. Don’t put all your eggs in one basket, diversification is the name of the game in terms of clients, customers and offerings. Look for funding opportunities that offer the best option for speed, traction, valuation and equity. And remember, in times of crisis investors want to see how you’ve managed this period whether it represents growth, maintenance or a business pivot. For savvy entrepreneurs, this means using funding not to just weather the storm but to continue building that bridge through to the rainbow on the other side.