How to raise capital in uncertain times-Alex Gold, Entrepreneur leadership network writer. With the new wave of the Corona virus pandemic getting worse with each passing day, economies have become crippled and this might definitely be a bad time to seek investment for your start up business.
Naturally, during periods of economic expansion, raising capital for a startup or new business is easier. But what happens when the market turns and we enter a recession or incur something unexpected, like the Coronavirus. How do entrepreneurs raise capital in when this happens?
This is a good question since most of the articles you will read about raising capital were written during times of economic expansion. Most likely, during the past decade. “Admittedly, even my own experience raising capital dates to just the past 10 years“. Entrepreneurs need to prepare for a recession and need to know how to raise capital in a down market. One of the best ways to do so is to prepare beforehand. When the economy is strong, you have the most options. Exploit them.
First, entrepreneurs need to prepare beforehand by establishing a clear defensive moat around their business metrics with a strong focus on profitability. Second, entrepreneurs should be flexible on terms and valuations understanding one important fact which is, capital is more important than anything else. Even if entrepreneurs need to take a lower valuation with more dilution than they anticipated, it shouldn’t matter.
When raising capital, entrepreneurs and investors often negotiate over the valuation of a business . Investors are trying to minimize the valuation in order to maximize their percentage ownership while entrepreneurs are trying to maximize valuation in order to minimize their relative dilution.
In a strong economy, entrepreneurs usually have the upper hand as valuations are being driven up across the board and investors have less power in negotiations. Conversely, in a down economy, investors often have the upper hand as there is less capital swirling through the market.
Entrepreneurs need to get comfortable with accepting a lower valuation. This is especially acute when a business has a short runway of capital and needs an infusion of investment to survive. In this predicament, entrepreneurs will usually take whatever lifeline they can get. If you can’t raise capital today, do what you can to survive till tomorrow.
