All businesses need cash to survive. Startups, who by nature focus on fast growth, can often only achieve this with the help of investors. If you run a startup relying on future funding from investors, your plans are likely going to be impacted by the coronavirus (COVID-19). This article discusses some options you have if your plans are impacted by the coronavirus, including: 

  • reconsidering who you are attempting to raise capital from;
  • whether you can bring your capital raise forward;
  • whether you can raise more money from existing investors; and
  • what actions you can take to slow growth to improve your chances of survival during this difficult period.

Raising Capital During Coronavirus

Raising capital during the coronavirus pandemic can be a precarious process. However, how significantly the current climate will impact your chances of success depends on: 

  • who you are trying to raise money from; and
  • what your business does.

Many startups gain initial funding from friends and family or angel investors. During the coronavirus, the funding available from these individual investors may tighten, and many startups may see deals fall through. Startup investing is a very risky enterprise. As such, investors will understandably want to play it safe when their wealth may be affected by the shrinking value of public markets. 

You may have a better chance of seeing a deal through if you raise money from:

  • venture capital funds;
  • accelerators; or
  • private equity firms

This is because the current economic downturn will less immediately impact them. Funds will still have money to deploy, and they will want to use it. This is especially because the current climate means they have greater leverage to negotiate better terms. Similarly, institutional investors may still be able to afford to invest despite the current circumstances. They also may be inclined to proceed as usual if they can get better terms for their investments.

The type of business you operate will also affect how willing investors are to take the risk of investing in the current climate. 

For example, businesses in the travel industry or whose supply chains are impacted by coronavirus will be perceived as less attractive investment prospects. 

However, businesses who facilitate communication, commerce or health services may be able to more effectively demonstrate their value.

Bringing Your Capital Raise Forward

If COVID-19 is likely to impact your startup funding, one of the key ideas you could implement is to bring your capital raise forward. 

As discussed above, many funds still currently have money to deploy. But this may not be the case in a year. Once they have exhausted their current fund, the fund will need to raise money again from private investors. The wealth of those investors may have been significantly impacted as a result of the economic downturn, and they may be more restrained in their investments. As a result, it may take a lot longer for them to raise their next fund.

If you are going to bring your capital raise forward, you may have to live with a lower company valuation. You may also have to adjust your calculations so that the funding provides you with a longer runway than you may have thought you needed. This is because revenue growth will likely be slower over the next 12-24 months, and your next round may have to be pushed back.

Here, you may be able to negotiate a larger investment from your investors, so that the money will see you through that longer runway. Obviously, raising more money than you expected at a lower valuation than you expected is likely to result in your ownership stake being lower than you would like. 

To avoid excessive dilution, you could look at raising a bridging round using a convertible note or SAFE instrument, rather than undertaking a straight equity raise. This would mean that you do not have to value your company until your next capital raise. At this point, the economy (and with it your company’s valuation) will hopefully have somewhat picked up. However, there may not be an appetite for this if you cannot ensure that you will be able to undertake an equity raise in the next year or two, which would convert the funds into equity.

Raising Capital From Existing Investors

If COVID-19 is impacting your funding plans with new investors, you may have to focus on existing investors. New investors may be understandably more risk-averse given the current climate. However, your existing investors will have an interest in protecting the value of their portfolio, so they will want to see you through this period as best they can.

If you end up raising money at a lower valuation than your last round, you will also need to be conscious of your responsibilities to existing investors. 

For example, you investors may have anti-dilution rights which apply when your company completes a raise at a lower valuation, often known as a ‘down round’. 

Slowing Growth and Cutting Costs

If your opportunities to raise capital from new or existing investors are exhausted, and your cash is dwindling, there may be no other choice but to slow growth and cut costs. 

Some actions to consider include:

  • reducing spending on payroll, marketing and other costs;
  • avoid spending ‘ahead of the curve’;
  • focus on your existing customers, ensuring they have a great experience despite the current circumstances and do not churn;
  • focus on research and development, so new features and products are ready to go when the market picks up;
  • get creative and consider the ways your products or services may be well suited for this current environment; and
  • re-map your runway to see you through the next 12-24 months.

You should also stay informed on any Government initiatives to assist businesses during these hard times. Take advantage of any that apply to you to ensure you have the best possible chance of weathering the storm.

Key Takeaways

If COVID-19 is impacting your startup funding, you need to consider: 

  • who you are attempting to raise capital from;
  • whether you can bring your capital raise forward;
  • whether your existing investors are willing to put more money into the business; or
  • if none of those options are available, what actions you can take to slow growth and cut costs.

If you are about to raise capital and need assistance completing it during this difficult time, contact LegalVision’s COVID-19 legal team by contacting us on 1300 544 755 or fill out the form on this page. 

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

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Sophie Mao
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