Raising Money in a Downturn

gold coin rolling down hill

Do you need to raise money for your tech business? Note the emphasis on ‘need’. Note also that our target market is emerging B2B tech companies thinking big, who are likely pre-Series-A and the commentary here reflects that.

Despite the US bounce back in May (adding 2.5M jobs), I think it’s beyond doubt that we’re in a downturn, if not a recession or even a depression. After all, the majority of the jobs added back in the US were hospitality jobs, reinstated after states eased their lockdowns by varying degrees.

One positive is that at least we know we’re in a spot. I was raising money back in 2008 and even in Q4 of that year was missing the financial crisis completely. None of our seed investors, nor the VCs we pitched were forthcoming with insights on the financial crisis.

But today we know. We can debate the severity of the downturn and the length of that downturn but the fact that we’re in choppy waters as a result of our government’s responses to Covid-19 is tough to challenge. In previous posts we’ve covered how to market in the coronavirus crisis and how you may have to pivot as a consequence of Covid-19, here we look at raising money.

First, do you need to raise money? If you still have enough cash runway then I would say don’t invest time and effort trying to raise extra capital. If you’ve already started your capital raise then you have a tough call to make.

How close to closing are you? If you’re not close and you have enough cash runway then revert to your business and managing your cashflow.

If you’re really close then don’t be afraid to ask the tough questions. Don’t let the close slide. Has your potential investor had a rethink about new investments and are they now favouring existing portfolio companies? If you don’t ask, you won’t know. If you don’t know…

If you don’t have the cash runway then your time may well be better spent managing cashflow than trying to hit that home run?

Peter H. Diamandis ran an interesting webinar on LinkedIn last month on Fundraising Post-Covid-19. He was joined by three VC managing partners and they were a pretty upbeat bunch as you would expect. Yes, they were still doing deals was pretty much the party line. However, one of the three managing partners (and forgive me I can’t remember which) did mention towards the end that he was very busy looking after the 50+ portfolio companies they had and making sure they had sufficient capital to get through any downturn. The implication being that their deals were more ‘follow on’ deals than new deals. Something, of which, you should be cognisant.

2008 and now 2020 have seen black swans. It’s quite easy to imagine we’ll be back here in years to come. What does that mean for how you raise money? To me it says don’t get greedy with your valuations. It may feel good to increase your valuation by a factor of 10x but if you get too far ahead of your real value, the next downturn may mean you can’t beat that latest valuation which looks bad to your ‘10x’ investors and doesn’t look great to your new potential investors either.

If you’re lucky enough to get to one or more term sheets, I would always recommend taking more new money at a lower valuation than less money at a higher valuation. For that and other learnings from my 2008 cap raise read this post and, for the avoidance of doubt, it was all my fault.

If you need a big boost in generating quality leads for your B2B tech business, please get in touch. It’ll help you with that runway.

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