Is your business trying to raise capital and feeling the pinch of current economic uncertainties?
Fundraising has become more challenging recently, including for emerging brands. Just a few months ago a great idea could easily get a $5M – $10M million cash infusion, but today, the landscape has changed with the looming potential of a downturn in the economy. If you do not have demonstrable traction with real revenue growth, it is going to be difficult to get the funding that was previously more readily available.
Your role as an entrepreneur is to preserve cash and make appropriate decisions to remove as much risk as possible from the fundraising process. However, today’s economic climate has added complexities that were not a factor just a couple of years ago. In addition, fundraising mistakes can have more severe consequences now, so you may want reassurance that you are focusing on the most important things.
Great companies are going to get financing, but you can no longer count on getting financing on your terms or on your timeline. If you are feeling stressed out, you are not alone. Let’s review some of the challenges business owners face in raising capital today and how to deal with them.
The Biggest Challenges When Raising Capital Today
Broadly, the macro environment has made investors more risk-averse. It’s important to distinguish between early-stage investors (Seed, Series A, Series B) – who have a longer investment time horizon (typically 5 – 10 years) – relative to late-stage investors.
While early-stage company fundraising is not immune to macro factors like inflation or rising interest rates, valuations and deal activity are not as dramatically impacted as for later-stage companies.
By contrast, late-stage investors are not as patient. They hope that an IPO or exit is imminent, and require a much quicker return.
To understand the current climate better, let’s look at the trends broadly affecting startup fundraising.
Investors expect to generate a return on their capital. With greater uncertainty around when and how much capital their investment will return, scrutiny on startups’ financial projections has intensified. The bar is higher.
Increased food and energy prices are hitting many verticals hard right now. For example, wholesale costs for the CPG industry have risen 35% since 2019. As about 70% of CPG costs originate from energy and ingredient costs, this has significantly impacted industry economics and threatens to extend the path to profitability.
Supply Chain Disruptions
Supply chain disruptions due to COVID-19 and the war in Ukraine have wreaked havoc on many industries. In 2021, 11,642 supply chain disruptions were reported worldwide, with North America having the highest share of disruptive events.
Investors’ Fundraising Timelines Are Stretching
Given the current economic climate, investors are preserving cash and approaching fundraising opportunities more cautiously. Therefore, you should expect that fundings will take longer as investors take on fewer opportunities.
Rising Interest Rates
As the Fed has increased interest rates (and signaled its plan to continue raising them to combat inflation), the cost of capital has gotten more expensive. This, in turn, has raised the required return threshold for investors. It will also be more costly to access debt financing.
Why There’s Still Room for Optimism
Despite these challenges, uninvested money (also called dry powder) is at historically high levels – around $290 billion – across all stages, suggesting there’s still plenty of money available for high-quality companies.
Moreover, according to Pitchbook, micro-funds (investments of $50M or less) have become more common in the last four years, collecting nearly $5 billion across 339 U.S. funds in 2021.
3 Tips for Raising Capital in Today’s Economic Climate
Here are our top tips for raising capital for startups today.
Start Building Your Network Early
Raising capital always takes longer than you think, so start now to get to know prospective investors before you need their checks. It’s much easier to say yes when investors are already familiar with you and your business, so start building relationships now. Quick tips to keep top of mind:
- Cast a wide net if you think you need money.
- Use your network to look into other options like family offices.
- Evaluate whether you have capital available or better terms from vendors and explore debt options if you have not already done so, such as asset-backed lending.
Outsourcing staff or using fractional teams helps conserve cash while supplying the knowledge and expertise required to run your business efficiently. Propeller specializes in scalable financial services that support your evolving needs while providing cost-effective solutions.
In this environment, investors are not giving as much credit to you for future goals. The longer you can make your current cash last, the more you control your own choices.
Plan for Different Scenarios
Control your destiny by scenario planning — thinking about how you spend your money, exploring your capital options, and staying focused.
We’ve advised many of our clients to do scenario planning. Shift your mindset from time-based fundraising to milestone fundraising, which may preclude you from having to raise again.
For example, you might raise money to get to cash flow positive, enabling you to be the master of your own destiny. Or, you might raise money to get to a set of milestones that make it easier to raise again down the road.
Focus on controlling what you can control. You should do granular scenario planning even if you choose not to extend your runway, or scale back. Get a clear picture of which levers you can pull under which circumstances.
How Propeller Navigates the Waters
If you’re feeling overwhelmed by the fundraising process or still have unanswered questions, you’ve come to the right place. Propeller Industries empowers the most ambitious startups to reach their full potential.
We leverage our decades of experience in investment banking, investor relations, and principal investing to give you an insider’s perspective and set you on the path to success. We’ll lead your business through a proven, methodical process that takes you from pitch deck to closing in just a few months.
From providing feedback on pitch materials to facilitating conversations with investors, Propeller is here to help growth-stage companies succeed in raising capital in today’s economic climate.
Dave has 25 years of professional experience in Investment Banking, Corporate Finance, Investor Relations, and Public Accounting. As a CFO and Co-Lead of Propeller’s Transaction Advisory practice, he has served over 75 SaaS, CPG, Blockchain, and Tech clients since joining in 2016.