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September 26, 2022

How to raise capital during crisis if you are an early-stage company

Raising capital over the last 10 years has been relatively easy and inexpensive. This was due to the large impact of the 2008 financial crisis which led to low interest rates and cheap capital. Cheap capital triggered more risk taking from both investors and entrepreneurs, resulting in more debt and more risky assets in search for better financial returns.  Abundant capital led also to unsustainable valuations particularly in tech startups.

From the regulation standpoint, the 2008 crisis led to unprecedented interest rate cuts and massive Quantitative Easing (QE) intervention from Central Banks, particularly in the US and the EU. QE strengthened bank reserves, provided banks with more liquidity, and encouraged lending and investment. As a result, the price everyone paid to borrow money was distorted leading to more risk taking.  After 12 years of distorted zero percent interest rates, cheap capital is gone, and entrepreneurs need to cope with higher cost of capital, and potentially tougher fund- raising.

Fund-raise during a crisis?

A continuing decline in pre-seed, series A and series B capital raise in the United States is well understood. As an entrepreneur, it is important to learn how to operate during times of crisis and market volatility. While raising capital during or after a financial crisis is harder, there are ways to do it. If you’re raising seed investments to launch your startup, or if you need advice on how to fund-raise after 2 years of crisis, here are a few pointers that can accelerate your business growth ensuring that you secure strategic investments.

Be creative finding the investors

I have argued that it is tougher to raise capital during a downturn. But I have also argued that there are billions of investment funds waiting to be allocated seeking disciplined entrepreneurs. Many investors are countercyclical, and many shrewd investors know that great investments are done during recession when businesses are suffering. The money investors hold in their banks is earning an insignificant return and what they’re looking for are investment opportunities that address today and future challenges. Crises are times to be proactive and be relentless investing in new connections and new relationships. Startups that succeed are those that “show- up”.

Focus on sustainability and diversity

One of the differentiators that can help you fund-raise is to show that your company is committed to decarbonizing the global economy and integrating Environmental, Social and Governance (ESG) priorities in your business model. This means that you have a gender balance approach to staffing, you have a diverse board, and you are aiming to address society’s challenges. Believe it or not, ESG focused companies are more likely to get funded in the current market, as investors and consumers want more transparency, equity, and sustainability.

Ignore the recession

Worrying and complaining about things beyond your control just makes you miserable and less effective running your business. Past crises show that the average Seed round size dropped during the 2000s dot-com bubble and 2008 financial and economic crises, but the total amount of money invested in early-stage startups increased. Overall, remember that the pandemic crisis wasn’t a crisis for start-up funding. Global venture capital more than doubled in 2021 compared to 2022, with most of the capital being invested in the tech industry. Having said that, smaller investment tickets will be more challenging, but good balance sheet discipline, product management and strategic planning should let entrepreneurs thrive during the ongoing crisis.

Final advise

Even if you are convinced you need money to launch or expand your business, you probably don’t. Raising money should be your last resort unless you need capital to fund growth. Put in as much sweat equity as you can and grow your customer base as this is the best way to fund your growth. In other words, tap into every resource you must grow your business before you talk to a more speculative investor.

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