The advantages and disadvantages of raising funds in US Dollars for startups
For the majority of startups, raising funds is an important step towards growth and success. In today’s world, it is difficult to compete with large corporations without solid funding to rely on.
The most common type of funding is cash funding, which typically comes in the form of US dollars. But is this the most efficient way to raise funds? In this article, we take a look at the advantages and disadvantages of raising funds in US dollars.
Advantages of raising funds in US dollars
Raising funds in US dollars has several advantages for startups. Firstly, it provides access to a larger pool of investors as the US dollar is a widely accepted global reserve currency. Secondly, it can reduce currency risk for startups as it is the preferred currency for international trade. This reduces the risk of currency fluctuations and exchange rate fluctuations.
Thirdly, US dollar denominated investments are perceived to be less risky, resulting in higher valuations for startups and better returns for investors. Lastly, US dollar denominated debt financing is easier to obtain due to its reputation as a stable currency, making lenders more willing to lend in US dollars compared to other currencies.
Disadvantages of raising funds in US dollars
While raising funds in US dollars can reduce currency risk for startups, there are still risks involved. If a startup primarily operates in another currency and raises funds in US dollars, it can be vulnerable to fluctuations in exchange rates, which can impact profitability.
Additionally, exchange rate fluctuations can significantly impact startups that raise funds in US dollars if the dollar weakens against their primary operating currency. Furthermore, interest rates for US dollar-denominated debt are often higher than for debt in other currencies, leading to higher interest expenses that can impact profitability. Finally, startups that raise funds in US dollars may face legal and regulatory compliance requirements, including compliance with US securities laws, which can be a costly and time-consuming process, especially for startups based outside of the US.
The current state of the US dollar
The most ideal time for startups to raise funds in US dollars is when the dollar is strong. Therefore, it is a good idea to take a look at the current strength of the dollar before starting any funding rounds.
There are various methods to assess the strength of the US dollar, but one of the most convenient options is to refer to the DXY chart. The DXY is a metric that tracks the performance of the US dollar against six other major currencies. It is widely recognised as the most reliable measure of the US dollar's strength.
As of the current time, the US dollar has experienced a YTD decline of 1.5%, suggesting a potential weakness in the market. This trend could pose a challenge for US dollar funding. However, it is crucial to note that market conditions are subject to change, and it is advisable to conduct thorough research before making any investment decisions.