It’s fair to say that it’s been one of the most challenging years to have been raising money for early and growth stage companies for quite some time.
Before this year, we had all grown accustomed over more than a decade to historically low interest rates – cash was cheap and more and more institutional investors fanned the flames of the post-pandemic VC feeding frenzy, stoking the volume, pricing and size of deals resulting in more and more money floating into earlier stage businesses often at eye-watering valuations.
That was soooooooo 2021, but the signs were there in 2022 that the ride was starting to slow down.
By 2023, tech stocks were in freefall, tech titans were haemorrhaging jobs and high-profile financial institutions were hitting the buffers.
A faltering global economy, war in Ukraine, rising inflation and interest rates inevitably took its toll on appetite for riskier investments.
Deals volumes and valuations are down significantly, diligence is more extensive and taking forever, and investors have largely been in ‘risk-off mode’.
Consequently, companies needing the lifeblood of venture investment to continue their growth journey have had fewer options available to them and have had to undertake a healthy dose of introspection deciding whether or how to:
Hunker down, cut costs quickly and deeply to survive – recognising this may only be an option if you were able to time your last raise well, have cash in the bank and the ability to sustain yourselves through to a better investment climate, and
Focus on the fundamentals of sales and cash management and raise money at more realistic valuations – OK, so this should be less of an option and more of a given but a return to focus on the fundamentals of sales, serving customers well and tight financial management was long overdue, and whether to…
Sell up and move on – recognise that you are swimming against the tide and finding someone with established channels to market maybe the only way for your product or service to see the light of day. Understanding the harsh reality that the investment gravy train has moved on might make for difficult conversations between entrepreneurs and investors, especially for those that bought in at inflated valuations while trying to sell an immature or half-baked asset.
Doom and gloom aside, one immutable fact that I’ve learnt from having been fundraising for more years than I care to admit is that markets and investment appetite will rebound, and strongly – the venture market has too much ‘dry powder’ and the desire to do deals and for reputations to be made will return. The Venture Capital market will dust itself off, crank into gear and inevitably the merry go round of boom-and-bust investment cycles will continue ad nauseum.
So, what does that mean for fundraising now?
If you are looking to raise money in 2024 then what can you do to sustain a decent valuation or worse still how do you deal with a down round?
We outlined in an earlier article that investors will want to see a clear and compelling growth plan focused on customer acquisition and retention and with strong financial discipline to manage costs. Get that formula right and money is most definitely still out there.
Valuations might not be as generous as once was, but that it is the nature of where you sit on the investment cycle and that needs to be clearly understood.
Focusing solely on a company’s valuation based on metrics from yesteryear that are divorced from the fundamentals and today’s market is a perennial problem for early stage privately funded companies and does nothing but store up problems for when institutional money is sought.
A former colleague of mine used to describe the most expensive money as the money you don’t take when its available.
Having a sense of your worth is important but expectations need to be realistic and from experience entrepreneurs are always slower to adjust expectations than investors. Establishing a competitive platform for the deal is the best way to get the best price.
What about a down round?
Experiencing a down round will be a difficult and challenging situation for any founder to navigate – not least because all those clauses tucked away in the investment agreements that you spent time being assured were ‘market’ start to rear their ugly heads and you should understand fully the implications of clauses such as the anti-dilution mechanism.
There are many good articles available about the mechanics of these and so I will defer to those for the moment. A quick google of “Are Anti-Dilution Mechanisms evil” should give you all the info you need.
However, here are a few more general strategies and coping mechanisms for dealing with a down round:
Eyes on the Prize and focus on the long-term: While this is a setback in the short-term and a real blow to the ego, it’s important to remember that the success of your business ultimately depends on its long-term growth and profitability. Focus on building a sustainable business model and executing on your growth strategy, even if it takes longer than expected.
Communicate openly and honestly: Be transparent with your investors about the reasons for the down round and what steps you are taking to address the issues. Honesty and transparency can help build trust with your investors and maintain their confidence in your ability to turn things around.
Reframe the narrative: Instead of focusing on the negative aspects of a down round, reframe the narrative by emphasizing the positive steps being taken to address the issues and position your business for long-term success.
Seek support from your network: Lean on your mentors, advisors, and other members of your network for support and guidance. They can provide valuable perspective and help you navigate the challenges of a down round.
Focus on building value: Use the down round as an opportunity to focus on building value in your business. This can include improving product-market fit, increasing customer acquisition, and reducing costs. By focusing on creating value, you can position your business for a successful future raise.
Consider alternative funding sources: While venture capital is a common source of funding for startups, it’s not the only option. Consider alternative funding sources such as debt financing, grants, or strategic partnerships.
In short, don’t be afraid to tackle the pricing issue head on. If the fundamentals of the business are still sound and there is still a long way to go, founders will have more opportunity along the way to strengthen their positions despite the odd pothole in the road.
It’s fair to say that it’s been one of the most challenging years to have been raising money for early and growth stage companies for quite some time.
Before this year, we had all grown accustomed over more than a decade to historically low interest rates – cash was cheap and more and more institutional investors fanned the flames of the post-pandemic VC feeding frenzy, stoking the volume, pricing and size of deals resulting in more and more money floating into earlier stage businesses often at eye-watering valuations.
That was soooooooo 2021, but the signs were there in 2022 that the ride was starting to slow down.
By 2023, tech stocks were in freefall, tech titans were haemorrhaging jobs and high-profile financial institutions were hitting the buffers.
A faltering global economy, war in Ukraine, rising inflation and interest rates inevitably took its toll on appetite for riskier investments.
Deals volumes and valuations are down significantly, diligence is more extensive and taking forever, and investors have largely been in ‘risk-off mode’.
Consequently, companies needing the lifeblood of venture investment to continue their growth journey have had fewer options available to them and have had to undertake a healthy dose of introspection deciding whether or how to:
Hunker down, cut costs quickly and deeply to survive – recognising this may only be an option if you were able to time your last raise well, have cash in the bank and the ability to sustain yourselves through to a better investment climate, and
Focus on the fundamentals of sales and cash management and raise money at more realistic valuations – OK, so this should be less of an option and more of a given but a return to focus on the fundamentals of sales, serving customers well and tight financial management was long overdue, and whether to…
Sell up and move on – recognise that you are swimming against the tide and finding someone with established channels to market maybe the only way for your product or service to see the light of day. Understanding the harsh reality that the investment gravy train has moved on might make for difficult conversations between entrepreneurs and investors, especially for those that bought in at inflated valuations while trying to sell an immature or half-baked asset.
Doom and gloom aside, one immutable fact that I’ve learnt from having been fundraising for more years than I care to admit is that markets and investment appetite will rebound, and strongly – the venture market has too much ‘dry powder’ and the desire to do deals and for reputations to be made will return. The Venture Capital market will dust itself off, crank into gear and inevitably the merry go round of boom-and-bust investment cycles will continue ad nauseum.
So, what does that mean for fundraising now?
If you are looking to raise money in 2024 then what can you do to sustain a decent valuation or worse still how do you deal with a down round?
We outlined in an earlier article that investors will want to see a clear and compelling growth plan focused on customer acquisition and retention and with strong financial discipline to manage costs. Get that formula right and money is most definitely still out there.
Valuations might not be as generous as once was, but that it is the nature of where you sit on the investment cycle and that needs to be clearly understood.
Focusing solely on a company’s valuation based on metrics from yesteryear that are divorced from the fundamentals and today’s market is a perennial problem for early stage privately funded companies and does nothing but store up problems for when institutional money is sought.
A former colleague of mine used to describe the most expensive money as the money you don’t take when its available.
Having a sense of your worth is important but expectations need to be realistic and from experience entrepreneurs are always slower to adjust expectations than investors. Establishing a competitive platform for the deal is the best way to get the best price.
What about a down round?
Experiencing a down round will be a difficult and challenging situation for any founder to navigate – not least because all those clauses tucked away in the investment agreements that you spent time being assured were ‘market’ start to rear their ugly heads and you should understand fully the implications of clauses such as the anti-dilution mechanism.
There are many good articles available about the mechanics of these and so I will defer to those for the moment. A quick google of “Are Anti-Dilution Mechanisms evil” should give you all the info you need.
However, here are a few more general strategies and coping mechanisms for dealing with a down round:
Eyes on the Prize and focus on the long-term: While this is a setback in the short-term and a real blow to the ego, it’s important to remember that the success of your business ultimately depends on its long-term growth and profitability. Focus on building a sustainable business model and executing on your growth strategy, even if it takes longer than expected.
Communicate openly and honestly: Be transparent with your investors about the reasons for the down round and what steps you are taking to address the issues. Honesty and transparency can help build trust with your investors and maintain their confidence in your ability to turn things around.
Reframe the narrative: Instead of focusing on the negative aspects of a down round, reframe the narrative by emphasizing the positive steps being taken to address the issues and position your business for long-term success.
Seek support from your network: Lean on your mentors, advisors, and other members of your network for support and guidance. They can provide valuable perspective and help you navigate the challenges of a down round.
Focus on building value: Use the down round as an opportunity to focus on building value in your business. This can include improving product-market fit, increasing customer acquisition, and reducing costs. By focusing on creating value, you can position your business for a successful future raise.
Consider alternative funding sources: While venture capital is a common source of funding for startups, it’s not the only option. Consider alternative funding sources such as debt financing, grants, or strategic partnerships.
In short, don’t be afraid to tackle the pricing issue head on. If the fundamentals of the business are still sound and there is still a long way to go, founders will have more opportunity along the way to strengthen their positions despite the odd pothole in the road.
As sentiment in the growth financing market has reset this year there is one consistent topic on the agenda with our clients. Debt and hybrid-debt options with low equity dilution have always been an attractive funding source when business valuations come under downwards pressure. However in this cycle, the retrenchment of equity providers has coincided with a coming of age for venture and growth lending in the UK as the available pool of this type of funding continues to deepen.
HMT has advised on two transactions in as many months for high-growth businesses (Chorus and Cirrus), securing debt structures to support continued organic growth strategies and for acquisitions, avoiding the need for costly equity raises or premature business sales. As the appetite to fund long periods of cash-burn dissipated towards the end of last year, the readjustment of 2023 business plans to bring profitability sooner has played into the hands of venture and growth lending appetite. Often used interchangeably as comprehensive terms, this type of financing steps outsides traditional bank lending policies and advances funding to fast-scaling firms that are often suppressing their profitability through a period of growth investment.
We have seen more variety in terms and structures emerging from this part of the market as the number of new credit funds targeting it has increased. Negotiations typically centre around financial covenants, amortisation profiles and the all-in economics for the lender. Interestingly a number of these funds continue to offer fixed interest rate loans in low double-digits resulting in a narrowing differential in the debt service costs versus the base rate + margin pricing from bank lenders.
Whereas in the past these loans may have been used to bridge to another equity round, the principle use of funds now is to bridge to self-sufficiency. Funds that provide time to execute the transition to profitability through more conservative growth plan prevents a costly equity “down-round” or a premature exit sale of the business.
The prospect of turning the tables in a subdued valuation environment and making acquisitions is also at play. Whilst lenders are more cautious, where identified targets are logical additions and the team has the bandwidth and experience to integrate them, appetite does exist to fund purchases with sensible deal economics.
Often a secondary consideration in the buoyant fundraising market of the last few years, the evolving debt market is providing more optionality for business owners than before. Engaging an advisor with a holistic approach and a live experience of the options is key to ensuring you make the right long term decisions for the business and shareholders through the market disruption this year.
Article written by Jack Longden – Director at HMT LLP
As sentiment in the growth financing market has reset this year there is one consistent topic on the agenda with our clients. Debt and hybrid-debt options with low equity dilution have always been an attractive funding source when business valuations come under downwards pressure. However in this cycle, the retrenchment of equity providers has coincided with a coming of age for venture and growth lending in the UK as the available pool of this type of funding continues to deepen.
HMT has advised on two transactions in as many months for high-growth businesses (Chorus and Cirrus), securing debt structures to support continued organic growth strategies and for acquisitions, avoiding the need for costly equity raises or premature business sales. As the appetite to fund long periods of cash-burn dissipated towards the end of last year, the readjustment of 2023 business plans to bring profitability sooner has played into the hands of venture and growth lending appetite. Often used interchangeably as comprehensive terms, this type of financing steps outsides traditional bank lending policies and advances funding to fast-scaling firms that are often suppressing their profitability through a period of growth investment.
We have seen more variety in terms and structures emerging from this part of the market as the number of new credit funds targeting it has increased. Negotiations typically centre around financial covenants, amortisation profiles and the all-in economics for the lender. Interestingly a number of these funds continue to offer fixed interest rate loans in low double-digits resulting in a narrowing differential in the debt service costs versus the base rate + margin pricing from bank lenders.
Whereas in the past these loans may have been used to bridge to another equity round, the principle use of funds now is to bridge to self-sufficiency. Funds that provide time to execute the transition to profitability through more conservative growth plan prevents a costly equity “down-round” or a premature exit sale of the business.
The prospect of turning the tables in a subdued valuation environment and making acquisitions is also at play. Whilst lenders are more cautious, where identified targets are logical additions and the team has the bandwidth and experience to integrate them, appetite does exist to fund purchases with sensible deal economics.
Often a secondary consideration in the buoyant fundraising market of the last few years, the evolving debt market is providing more optionality for business owners than before. Engaging an advisor with a holistic approach and a live experience of the options is key to ensuring you make the right long term decisions for the business and shareholders through the market disruption this year.
Article written by Jack Longden – Director at HMT LLP
