How to fund your business in times of crisis?
The current financial climate is disturbing for technology founders. At the European level, we have over 300 VC funds continuing to actively invest and grant-making programmes in every country, yet founders face many hurdles accessing capital.
Early-stage technology founders are foremost to feel the effect of economic downfalls. It is in periods like this where we understand the pressures of such entrepreneurs.
Many founders are faced with tough decisions over how to restructure the companies and potentially pivot to still be able to survive.
I am asked daily some challenging questions by companies I mentor and interact in our ecosystem. It led me to write this article which could provide a roadmap and some practical tips which I have tested over the years myself.
How will these founders finance in times of crisis? How can they evaluate the sources of capital and access it?
The lockdown caused an abnormal contraction of our economic activity, it was a shock and many investors, as well as companies, had to reposition themselves, focusing first on portfolio and internal matters, then evaluating the market potential.
Now as we are transitioning out of lockdown, we are faced with more restrictions everywhere around the world, and supply chains being effect, delays, and general complexity.
Economists have already confirmed that we are amid a recession, for founders this means an atmosphere of uncertainty persisting in the market.
Founders should reflect on an approach that works best for them and their business, as not everything will work for every situation.
1. Identifying the Essential
In difficult times founders are required to reflect on what is essential to the future success of the company and the team. It is a tough exercise to decide whether a role whether it is technical, operational or otherwise is important, however as a founder and leader you need to be ready to understand what will help you advance your product offering, or market your products or help you retain existing clients through this next period.
It is important to look at current expenses and detect the ones you can remove, reduce, or delay. In an attempt to provide the team more time to be in the market with prospects and clients, you may identify investments in technology. Improving the productivity and wellbeing of a team in periods of great pressure could be the key that makes this work.
Whether you are reducing your expenses or investing in tools for productivity, it all must be essential for the survival of the company and help retain the talent on the journey. If you couple this with some intelligent capitalisation of the company it will help expand the company's financial strength.
It is a time to organise your business: addressing the competences of the team, streamlining internal processes, and keeping your performance in check. Ensuring that you have controls in place to avoid vulnerabilities in the way you manage the team and finances are of the utmost importance.
2. Private Capital and Venture Capital
In times of great challenge, it will not be the best technology company that survives, it will be the best-funded company with the best people working together on a shared vision.
Investors expect founders fundraising in these current conditions to acknowledge that resilience is important, and to do so longer runways are required, ideally 18–24 months.
It is futile to go out there for three to six months bridging rounds unless you are already close to breaking even. It sends the wrong message to both private sources of capital (angel investors) and VCs.
Delaying fundraising is not a great strategy either if you must fundraise you need a strategy, you need to be selective on your investors and their ability to continue to fund you if the recovery period lengthens. This is the time to build relationships with investors, share your progress in a more coordinated manner and invest time researching the way they assess companies, the timeline, what their expectations are and their portfolios.
In the absence of face to face interactions, we need to be able to relay the right messages quicker and be able to follow-on with the right materials or details. Delays, when we are not able to build emotional connections with our investors, can cause disinterest. Conference calling will never be able to help us really our mannerism, emotions, limiting our ability to express our value proposition.
For qualifying investors, the newly created Future Fund will provide further capital, it is worth discussing this with VCs and funders early in the process.
3. Government Incentives and Grants
Cash is the oxygen for any business, and we are fortunate to have many governmental programmes to support Small and Medium Size businesses and technology start-ups and scale-ups.
It is important to familiarise oneself to the Research & Development tax credits, the Job Retention Scheme, the COVID Interruption Business Loan Scheme, the Bounce Back Loan Scheme, Future Fund and many more.
Many local councils have introduced grants to cover rental costs and stimulus to support small businesses. It is worth checking all the programmes to ensure participation in everything that is applicable to the business.
Founders can be provided with a few further months of runway managing the tax rebates with HRMC.
4. Customer Finance and Business Models
The stunning way to get yourself out of an economic fight is a beautiful shot to your cash inflow and your business model. Evaluating your up-to-date sales strategy and marketing to implement new policies for improving conversion will have an actual positive outcome on the income stream.
Many companies have made it easier for clients to pay upfront for services and goods, changed their approach to stimulate business, provided discounts for pre-payments and yearly subscriptions. It is a point where every business must do some reconnaissance on clients, understand their challenges, and optimise for workable solutions.
The alternative scenario is that customers will feel disengaged and churn rates will start increasing, that is not great for many reasons, one of which is the message it sends to the investors, existing and future.
As founders, we must be nimble, connect and optimise constantly. Some of the best businesses are built in recessions and challenging times, this will be no different.