Raising Funds During Difficult Times
Coaxing investors to invest in a company during an economic downturn becomes hard. If a startup fails, then the financial pain would be unbearable for the investors
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You may need financing for seed capital or to expand your business into new markets.
Whatever your reason maybe to raise funds, you have got to do it right.
Apart from the obvious monetary benefits, raising funds have many other advantages that prove valuable to your organization. It not only brings in cash but also creates a huge impact towards the success of the organisation.
But what do you do when the economy is slow?
Coaxing investors to invest in your company during an economic downturn becomes even harder. If a start-up fails then the financial pain would be unbearable for the investors. Investors would have to see something really special in your business that they would readily finance you even though the money is tight.
Is it tough to get funding during these economic conditions? Yes. Is it impossible?
You must look at the situation as a challenge and not as a hurdle.
And that is why it is essential that you bear in mind these 7 important factors when undertaking fund-raising during a difficult economy. While this is not an exhaustive list, it should definitely make its way on your checklist.
Ask yourself if you really need to raise funds? Don't follow the herd. While there are benefits of raising funds, but please bear in mind that by getting an external investor you are not only diluting your equity in the company, but also ceding control on various aspects. So if you don't really need funds to achieve your growth plans, defer taking in funds, especially during these times when supply is less and demand is more, leading to much sharper valuations which effectively results in higher dilution. Also, if you can grow further, without investor funds, then you can raise funds at a later stage at better valuations since you would be at a different stage as compared to current one, with respect to revenue/growth/market share, etc.
In the great war of Mahabharat, Pandava's had a much smaller army, as compared to that of Kaurava's. But they had one great strategist - Krishna. It is planning and strategy that helped Pandava's to win some of the finest and greatest warriors of Kaurava's.
Similarly, the decision to raise funds should also be backed with sound strategy and a lot of thinking. This will not only help you as an entrepreneur in formulating your action plan but will give the investor the needed comfort when he asks you all sorts of tricky questions.
Below is a quick checklist to assist with this process:
i. Prepare a 5-year detailed financial forecast model, with all possible variables of the business captured, properly linked
ii. Run sensitivity scenarios on the forecast model to assess 'What if 'situations.
iii. Ensure you have a clear runway, post raising of those funds
iv. Ensure these forecasts are what you clearly believe as achievable and not just for the sake of investor presentation
v. Undertake a thorough SWOT analysis to identify areas for improvement
vi. Study and understand your competition thoroughly. There might be questions from investors who might have interacted with them closely. Knowing and accordingly addressing your competitive landscape is very important.
vii. Clearly, list down what all are you looking for from the investor and identify alternate means to achieve those. (E.g. if you are looking for more strategic advice and less of funds from the investor, then can you get that same advice from a professional consultant?)
Ability to execute is one the most important parameter that all investors assess. And it is the quality of your team that defines this. So ensure you have the right team onboard and that your planning/vision should include precisely what kind of future talent is required to build the business.
As regards the team that goes to meet the investors, it is quite helpful to have your CFO or someone who understands finances accompany.
4. Due Diligence
There are several generic diligence checklists available. Grab one of them and ensure you are so well prepared that there are no surprises during investor diligence. If there are contentious items, discuss those upfront with your investor. Don't give an opportunity to your investor to renegotiate terms because something important came up in your diligence. Also, try and get as much possible covered on the diligence front before you sign your term sheet since that will inevitably have an exclusivity clause, which will lock you out from talking to others. So you need to ensure that this period of diligence is kept as short as possible and should be completely under your control. For certain items on the diligence list, have a reputed third party professional review and provide a diligence report. For e.g. get a good accounting firm to confirm your numbers or a lawyer to review all your agreements and have them put together a summary of all terms.
5. Investor Presentation
Below is a quick To-Do list, as you prepare for the Investor Presentation
i. Prepare a good, concise and crisp presentation
ii. Rehearse few times internally, before commencing investor meetings
iii. Do have a good elevator pitch and engage with your investor audience well
iv. Business-related slides should be presented by the Founder/CEO/COO and finance related by CFO.
v. Each team member (attending the investor presentation), should give a good introduction about themselves.
vi. Carry hard copy presentations. Technology sometimes doesn't work, when you need the most.
vii. Prepare a comprehensive list of possible investor questions and your answers
viii. Ensure you run various analytics on your business so that you can quickly respond to investor queries (e.g. Key Financial Ratios, Cohort Analyses, Conversion, etc.)
ix. Research the investor well, before you meet
x. Read body language of the investor and drive your presentation accordingly.
xi. Irrespective of how attentive your investor is, or how arrogant they might appear, do your best. Sometimes these are posturing techniques.
xii. Ensure you excite the investor to the extent that he/she should feel that not investing your company will mean he will lose that big opportunity. However do this convincingly and it should not appear that these are just big talks.
xiii. Reach before time for your meeting. If the investor has back to back commitments, he will not be attentive when it is the most important part of your presentation. Also, before starting your meeting ask the investor how much he has, and basis that time yourself.
xiv. When offered, it is always good to take some tea/coffee. That will ensure that you are given at least some basic amount of time for your discussions with the investor.
xv. Have a well thought out strategy for providing an exit to the investor.
Once you have convinced your investor for investing in your company, here comes the important task of negotiations. Below are some quick tips to successfully achieve the best, in your favour:
i. Ensure you are familiar with all standard terms. You need to first understand terms that are standard that you should not negotiate and know of key terms you want to negotiate.
ii. If you are familiar with standard terms and negotiations around the same, that's fine; else seek the help of someone who does this professionally or has done this for his own business.
iii. Posture well during negotiations. Any sign of desperation in seeking funds will act against you
iv. Sometimes saying a simple 'No' to a condition of the investor may not work, and could become a deal-breaker. You should in those situations agree to the condition, but suggest how that should be operational or parameters under which it should come into play.
v. Good Cop, Bad Cop role play helps sometimes, not always. So assess the situation well on the ground before resorting to any such techniques. Remember, you want to negotiate the deal and not break away from the deal.
7. Deliver on your promises
Once you have raised funds, the journey begins. You need to now begin delivering on all your promises. Be transparent and honest with your investor. He is now equally interested in the business as you are and hence taking feedback/guidance will be helpful. And for whatever reasons, after trying your best, if things don't play out as you expected, work harder to ensure your investor is rewarded well of having trusted you and invested in your venture. This might sometimes even mean going outside the terms of the agreement and giving more equity or finding alternate ways and means of helping the investor with the exit. Remember, you might have to go out to raise more funds for this or another venture. And nothing can replace having your investor as your brand ambassador who is always vouching and campaigning for you, for your capabilities in generating good returns for him.
Happy Fund Raising!
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.