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How to Recession-Proof Your Capital Raise

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How to Recession-proof Your Capital Raise

Raising money: it’s something that most companies need to do at some point in their journey to launch, finding product-market fit, and unlocking growth.

When you’re raising equity investment for your business it’s important to know that this aspect of business is prone to be impacted by a crisis or recession. It’s not that the investors – whether angel investors, angel groups or venture capital firms – suddenly have less money to invest or no money. It’s that they will react with a mix of personal and business reasons that will change the way things happen.

Common ways in which investors react during a crisis or recession

They pull back
Some investors will become very cautious and will reduce the number of investments they make. Get intel on their recent activities as they are still great investors and worth engaging.

They invest in their own

Investors in a recession will often turn inward to focus on their current portfolio and ensure that they are able to weather the storm. This takes them, in large part, off the market for new investments for a period of time.

They exercise more caution

Some investors will be more cautious on terms, looking more to convertible notes and SAFE agreements to protect downside risk.

They look for deals or become predatory

This is a great time for investors to look for deals and entrepreneurs lower valuations for Thankfully, this is a very small percentage of investors, but they do exist and you want to watch for overly aggressive valuation numbers, liquidity preference, ratcheting, and board seats as potential signs. Not sure about their intentions? Do your homework and check their references.

They look for deals or become predatory

This is a great time for investors to look for deals and entrepreneurs lower valuations for Thankfully, this is a very small percentage of investors, but they do exist and you want to watch for overly aggressive valuation numbers, liquidity preference, ratcheting, and board seats as potential signs. Not sure about their intentions? Do your homework and check their references.

They get more active

The next group gets more active, buying in a down cycle to get better deals and then patiently waiting out the recession for the promise of bigger wins down the road.

They don’t change a thing

In good times and bad, boom or bust, some investors consistently invest in the same sectors with the same approach and support.

With changes coming, here’s how can you set yourself, your round, and your company up for success.

Traction trumps all

There’s no surprise here: the companies that capitalize on a down market through great scale-up strategies and execution will always attract investor interest. To ensure you raise a great round, your goal is to set the tone on what progress should look like, and then rally your team to achieve that momentum. For impact entrepreneurs, the opportunity to blend impact progress with market progress can be a powerful incentive for mission-driven investors to support your combined success.

Tap into non-dilutive

Many communities have a wide range of grant and loan options. Your role as the leader of your business is to explore those at all times – raise or not, recession or not. Depending on the type and stage of your business, don’t forget crowdfunding as alternative ways to fuel your growth.

Know your plan B and C

Be prepared for the possibility of your round not going according to plan. What if you raise 75%? What if you raise half? What about not at all? What if investors want to change the paperwork? Your goal is to map out strategies and approaches that allow you to take good money in and adapt around revenue, costs, partnerships, grants, and loans to achieve your goals. Don’t forget to look at equity crowdfunding if it is available in your region as a potential alternative approach.

Focus on your ideal investor

Most entrepreneurs are prone to pitching any investor under the mantra of “you never know.” That’s a poor choice, especially when you would never sell your product or service in that way. In a recession, the more you focus on values-aligned investors who get your space and business model, the easier it will be for you to raise. This is especially important for mission-driven entrepreneurs seeking investors with the right impact and return alignment.

Get it done now

As the old saying goals: “better a bird in hand than two the bush.” If you’re in the middle of a round, try and get it closed now – ideally before the recession hits and before the traditional December seasonal slowdown. If you have active interest now, try and close the round in addition to thinking about how you can fill out your funding needs through other sources.

Set reasonable expectations

Round sizes and valuations are often “corrected” in a recession. That could mean smaller rounds, lower valuations, and tougher terms for you. Work through scenarios that have you adaptable to raising less while still getting your company where you need it to go. Watch the local, regional, and global trends in round sizes and valuations to ensure you’re either in line with the new expectations or ready with strong reasons for your differences with a backup plan that will allow you to be patient for a longer raise.

Think global, act global

If you’re changing the world, then you should invite the world’s investors to the table. Cross-border investors will still find interest in business models and industries that are aligned with their investing thesis. Be fearless to find great global investors.

Surround yourself with a great advisory board

Advisors can not only help you steer your company well through the bumps and turns of a recession, but they can also help you connect with and navigate the investor community. Building an advisory board with depth in investment rounds, scaling up, and recession proofing is always an excellent idea, and in time such as these have a board purpose-built to help you close a round could be the difference between an excellent round closed and a no round at all.

Have your due diligence package ready to go

It always surprises me when entrepreneurs have not prepared prior to embarking on a raise. However, know that you are being compared to all the other entrepreneurs and companies and investor meets. You must have your core due diligence package ready to deliver to investors to show them you’re ready, have done your homework, are smart, know the levers to pull to make your business thrive, and are adaptable to whatever the world throws your way.

Now what?

As you step away from this post, consider where you are in your raise, where your investors are on the spectrum of change, your state of readiness, and what your Plan B looks like. With these answers in hand, you’ll be able to set yourself and your company up for success regardless of a recession and the specific outcomes of your round.

Need more help?

Join a Spring Funding roundtable for active fundraising support, mentorship, and learning with a community of entrepreneurs at a similar stage in business and an experienced fundraising facilitator. 

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