History tends to repeat itself.
We have good times and not so good times. The market is cyclical.
With the election turmoil ahead we were already poised for uncertainty. Coronavirus pored a lot of gasoline on this fire.
Yesterday Sequoia Capital called Coronavirus the Black Swan of 2020.
This is a dramatic description, but an accurate one. Their post is full of smart advice, please go read it.
What it boils down to is this:
Turn the uncertainty into an opportunity.
I previously wrote a post that should come handy focused on how to raise capital in a slower market.
Now, I want to specifically focus on the round dynamics for the founders who are in the middle or have to raise capital right now.
1. Focus on your round and close ASAP
In general, time can be our biggest friend and also our biggest enemy.
It feels like right now, time is not on our side.
The likelihood of more near term uncertainty and potential panic over the next 3-6 to even 9-12 months is increasingly high.
If you are close to closing your round, close it NOW.
What this is means prioritize fundraising, put ALL of your energy into it, and get over the finish line.
2. What to do if you have a signed term sheet?
If you are lucky to already have the term sheet and are working through the financing docs, you are in a good spot.
While historically some rounds felt apart or got re-negotiated, this is no longer common, especially if you have reputable firms involved.
Start by agreeing with the lead on the closing date. You should be able to close in 4-6 weeks within the signing of the term sheet.
Pick an earlier date. Push for no shop expiration at that date to create pressure on investors and lawyers to wrap up diligence.
Actively move the diligence forward.
Have documents ready, stay on top of the whole process. Do a quick daily check-in with your lawyers, make sure things are moving along, communicate urgency and communicate clear closing date over and over and over again.
Also, actively communicate with the lead, continue to align the expectations around the closing date.
You would be surprised how many founders let go of this process, and then it spins out of control, drags and, at times like this, sometimes falls apart.
Don’t let this happen to you!
3. What to do if 1/2 of the round is closed
If 1/2 of your round is closed and money is in the bank, take a deep breath.
Review your finances to understand how long the capital will last.
If you don’t need more capital, and think you can run for another 12 months, consider going back to execution mode.
If you absolutely need more capital to get to your next milestone, then go back to the market.
Use what you’ve closed as leverage.
First, offer people who already invested to invest more. This could be the easiest capital to get since people are already on the inside.
Secondly, use the network, ask committed investors for introductions to people they often co-invest with.
During uncertain times trust goes even further, especially in group sport like investing.
Next, set a clear timeline for your raise. For example, communicate that you are going to wrap up in 4-6 weeks and it is on a first-come, first-serve basis. You can do that since you already have some capital committed.
In general putting each investor through a clear process, moving everyone through the funnel is key to getting the rest of the round done.
4. What to do if 1/2 of your round is soft circled
If you have people committed, but no money in the bank, you are in a tougher spot.
The problem with the soft-commit is exactly that — it is soft.
During the uncertain times, soft-commits may not come through.
So how to deal with that?
First of all, if you already have investors from the previous round, go to them first and get them to re-up, even if it is not for a big amount. This will send a great signal to new investors.
Next, try to close the money you have committed asap. Incentivize people with a discount, close on a lower valuation.
Yes, you will be more diluted, but the money in the bank will give you leverage – both to execute on the business and to create more leverage with other investors.
Also, revise your financial plan and make sure that you can clearly demonstrate getting to meaningful milestones in 9-12 months.
Smart investors will ask for that.
5. What to do if your round is not going well
You need to re-assess your raise.
It is incredibly unlikely that if you raise was not going well that in this market it will go better.
Hit a pause button. Take a deep breath. Cut costs. Re-think your strategy. Get creative.
You are better off coming back to the market later, so figure out how to survive in the meantime.
6. What to do if you haven’t started
If you haven’t started and you don’t absolutely have to start now, consider delaying your raise.
Get creative. Stretch your capital. Cut costs. Focus on getting more revenue.
Avoid raising now if you don’t have to.
If you have existing investors, who are offering to put more money into the business now, that’s a no brainer, do it. Create favorable terms for them. Don’t overthink it, and take advantage of getting the capital while it is there for you.
7. What to do if you are out of cash soon
If you are running out of cash and you don’t have the support of insiders, you are in a tough spot.
Cut costs asap, do not wait. Every month matters. Cut to the bone, don’t do partial cuts, they are the worst.
Then either go to the market if you absolutely have to, or see if you can ride out the storm.
Consider your other options — is there an M&A possibility or an investment from a strategic? While most likely not a great outcome at times like this it can be an outcome.
Most importantly, be clear about where you are. Do not panic but also don’t delay in making tough decisions as that can be the worst thing you could do.