Winter Is Coming: Is Your Startup’s Funding Secure?
“Winter is coming.” Ned Stark knew it years ago, and for many startups and entrepreneurs, it seems like the entrepreneurial winter is just around the corner — even with spring in full bloom.
Those of us who weathered the last winter remember how difficult it was. In 2007, many companies did not raise capital quickly enough or delayed raising capital altogether. When the recession hit, the funding market shut down almost completely. And while it eventually recovered, the damage was already done for many companies.
Now, analysts are predicting that we are on the precipice of another economic downturn. After rising by more than 90 percent from 2008 to 2014, the S&P 500 is down by 9 percent thus far into 2016. During the first quarter alone, the tech IPO market froze over — showing its worst numbers since the Great Recession.
With VCs running a tight ship, entrepreneurs need to do everything they can to insulate themselves from the impending turbulence of the funding market. Winter is coming, and those caught unprepared will struggle to survive.
The Challenges of Securing Capital
Funding has always been difficult to acquire, particularly for women and minorities, but capital is becoming even tighter this year. The VC industry is nervous thanks to the slowdown of the IPO market and the continuing trend of fewer companies going public.
Reticent VCs will slow down the frequency and volume of their investments and seek to invest in only the highest-quality deals. They also push down the valuations of companies that do hold initial public offerings and aggressively restructure companies that need capital but cannot come up with it on their own due to either poor performance or perceived competitive weakness.
On the entrepreneur’s side, even a startup with a viable business plan and a defined market can struggle to secure funding if the founders approach potential investors the wrong way. Failing to build relationships, approaching the wrong people, appearing desperate for funding, or appearing unfamiliar with an important business aspect can all work against an otherwise viable young company.
These are strategies that I’ve employed to prepare for whatever winter may bring:
1. Keep a Capital Reserve
It might sound like a luxury, but every startup needs an emergency capital reserve. Ideally, startup leaders should have 24 months’ worth of capital available at all times in case funding dries up. Hit the funding road hard, and do not stop when you feel like you have enough to scrape by. Continue to seek out funding so when new funding is nowhere to be found, you will have that cash cushion.
2. Do Not Underestimate the Timeline
Raising capital takes an average of six months. Do not rest on the dangerous assumption that you can get someone to write you a check within a month. This is a time-consuming process, and procrastination will leave you out in the cold.
3. Consider Every Avenue
VCs are only one of several options available for funding. Angel investors and equity crowdfunding can be great avenues for startups with a product or mission that resonates with a specific person or group.
4. Secure Introductions
Even when you do not need them immediately, more exposure to potential investors never hurts. VCs rarely invest in a company without an introduction from someone they trust. Ask one current or potential investor to introduce you to another, then ask him or her for another introduction. If you have the opportunity to attend an event for VCs, go with an aim to establish relationships — not secure funding.
5. Test the Waters
Start an equity crowdfunding test-the-waters campaign to prove the viability of your business to potential investors. If the results of your campaign are significantly higher than you expected, do not feel that you must find another investor if you do not need one. Equity crowdfunding will allow you to take control of your company’s destiny.
Do not get caught unprepared for winter. Optimize your funding strategy to keep your business running hot in even the coldest months.
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The views and opinions expressed in this article are those of author Howard Marks. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:https://www.startengine.com/assets/Disclaimer.pdf