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Crisis Ahead? Why the fundraising landscape is about to get tough

Written by David Pattison on Thursday, 14 July 2022. Posted in Funding, Finance

Fundraising is never an easy process for young businesses seeking investment, and all the signs are that it's about to get even more difficult.

Crisis Ahead? Why the fundraising landscape is about to get tough

Fundraising is never an easy process for young businesses seeking investment, and all the signs are that it's about to get even more difficult. There are a lot of global socio-economic factors in play that will affect the values of businesses. A war in Ukraine, the hangover from the pandemic, inflation levels unseen in forty years, huge hikes in energy prices, supply chain issues and a shortage of workers being the major contributors.

Private Equity (PE) and Venture Capital (VC) houses are already talking about the fact that ‘winter is coming’ and ‘belts will need to be tightened’. Some have already said that they are not looking at any significant deals for at least six to nine months. Those that are open for business will be looking very hard at valuations and the terms for their investment funds. The investment deals done now will almost certainly be in favour of the investor and not the business they are investing in.

Corporate Finance houses are warning businesses looking for investment that now is not the time to do it and if you can wait then you should.

What’s all this got to do with a young business looking to raise it's first or second round of funding?

  • There will still be individuals who make up the seed investor/angel investor/high net worth investor markets. This is where the majority of early funds come from.
  • And Governments will keep in place advantageous tax breaks to incentivise these individuals to invest.

The answer to the question is that there will be a trickle-down effect. What has already happened in the public markets is now happening in the top and mid-level private markets. Reduced valuations and reduced funds availability are already happening.

The bigger companies who can’t raise funds from either PE or VC investors will look elsewhere. They will have contingency plans to get them through by raising less money in the short term to get them to the next ‘good money’ phase.

Experience tells me that young businesses will be in a much more competitive market for the funds available and will have to offer more advantageous terms to attract that funding. The individual investor is also in a slightly different position in that they don’t have to invest. If they are unsure of the company, the market, or the deal they will walk away.

There are lots of things that young businesses can do to help themselves through this period and here are a few options:

A break-even/profitable plan

Look very hard at your business and see if you can get to a financial strategy that gets the company to self-sufficiency. It can mean some real tough choices and it may mean slower growth. But you will still be in business, have an element of control and be able to make choices as time goes on.

Look at a lower raise

Buy yourself some time. Instead of going for the big raise look at a lower level, interim raise that will get you to the next stage of business growth. You will have more data for the next raise and will not have had to give away too much of the company to get there.

Talk to your current investors and shareholders

Linked to the above point, your current investors and shareholders should be your first port of call when it comes to a lower raise. They may well have dismissed the idea of investing again into a larger round, but a lower level might be attractive to them particularly if you can offer an advantageous deal, and they are precisely the people who should get an advantageous deal.

It will also look very good to any future investors who have seen your current shareholders invest in difficult times.

Summary

How a business behaves in challenging times is much more important than when everything is good. It seems pretty clear that a tougher time is coming, and this won’t be restricted to just the big companies looking for funding. It will eventually reach all parts of the market. Being prepared for this is the best thing you can do for your business.

About the Author

David Pattison

David Pattison

David Pattison is a chair, mentor and advisor for multiple businesses in diverse industries. After becoming a board director at the age of 29 and co-founding his successful media agency PHD, he has advised over 20 businesses, chaired 10 and led three successful exits. David currently chairs three businesses and convenes MBA and MSC courses at Manchester University Business School. His new book, The Money Train: 10 Things Young Businesses Need to Know About Investors, won a Business Book of the Year Award 2022. 

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