Starting Up

STAY FINANCIALLY AFLOAT IN A TOUGH FUNDING MARKET

By David Pattison

It would be fair to say that up until very recently tech businesses have fared well through the pandemic. The massive hike in the publicly listed stock prices of tech businesses and the successful IPO’s that have taken place at eyewatering valuations are testament to that.

The NASDAQ Composite Index which has most of the large American tech businesses in it grew by 100% between April 2020, when the effects of the pandemic first hit, and January 2022. Half of those gains have been given back with the majority happening in the last month.

It’s not a dissimilar picture in most of the public markets around the world. What is hidden within the broad numbers are some significant differences in the price swings. The established tech brands have lost value in line with the market at around 25%, but some of the newer tech businesses that were valued at anything up to 50x ARR have lost up to 80% of their value. Potentially storing up very big problems for fundraising in the future.

Most market watchers would argue that it is just a market correction and that these stocks are now priced at around the right level. They are used to markets correcting themselves and then building again once the sentiment moves from bearish to bullish.

But the current tightening in the fundraising market feels a little different. Corporate Finance houses are warning start-ups looking for investment that now is not the time to do it and if you can wait then you should.

There are lots of things that young businesses can do to stay financially afloat during this tough funding period and here are a few options:

• Be ready to make your business either break even or profitable

Look very hard at your business and see if you can get to a financial strategy that gets the company to self-sufficiency. It can mean some real tough choices and it may mean slower growth. But you will still be in business, have an element of control and be able to make choices as time goes on.

• Don’t look for a big raise

Buy yourself some time. Instead of going for the big raise look at a lower level, interim raise that will get you to the next stage of business growth. You will have more data for the next raise and will not have had to give away too much of the company to get there.

• Discuss a lower raise with your current investors and shareholders

Linked to the above point, your current investors and shareholders should be your first port of call when it comes to a lower raise. They may well have dismissed the idea of investing again into a larger round, but a lower level might be attractive to them particularly if you can offer an advantageous deal, and they are precisely the people who should get an advantageous deal.

It will also look very good to any future investors who have seen your current shareholders invest in difficult times.

All the signs are that a tougher time is coming for start-ups seeking investment. How businesses conduct themselves during these times is much more important than when everything is stable. Being prepared for this is the best thing young businesses can do to stay financially afloat.

David Pattison is a start-up funding expert, business chair and mentor, and author of The Money Train: 10 Things Young Businesses Need to Know About Investors. The book won best Startup / Scaleup book at the Business Book Awards 2022.