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Ten tips for raising capital in a challenging climate

Start-up investments have been super buoyant in the last two years. According to a recent publication by PWC, approximately $257 million have been invested by Early Stage Investors in start-ups in 2021, a 63% increase compared to 2020.

Things have changed. We now find ourselves in an increasingly challenging economic climate – high inflation, increasing interest rates, labour shortages, and supply chain issues. I am hearing from founders that raising capital has become more challenging, whether they’re raising their first or follow-up round.

So, what can start-up founders do to improve their chances of successful capital-raising in this changing and challenging economic environment?

Opportunity is knocking. Yes, it’s not all bad news. There are, in fact, massive opportunities for Kiwis amidst the current turbulence of the global markets. I hosted a panel of experts from various investment backgrounds at a recent webinar. They were full of encouraging and practical tips for founders and entrepreneurs looking to raise capital.

Here are ten tips from the webinar that will be invaluable for founders and entrepreneurs on their path to success in their fundraising efforts.

Thanks to Rudi Bublitz, Flying Kiwi Angels; Cassie McAdams, Movac; and Rob Vickery, Hillfarrance Venture Capital, for sharing your wisdom.

Show your current customers some love

In challenging economic times, consumers naturally justify their purchases more carefully – including the upcoming annual subscription to your product. So it is worth investing more in customer success by showing your current customers some love. Work at looking after your customers consistently with regular updates and communication, giving them free trials for new products or another low-cost strategy. Ultimately you want your customers to feel that your product or service is essential. As indispensable as their morning coffee.

Show your existing shareholders some love

Getting new investors involved in more challenging times might be more difficult, so it pays to look after the ones you already have. Make a constant effort to strengthen those relationships with your existing supporters. Whether it is a monthly update, some other form of communication, or even changing the cadence, figure out consistent ways to keep in touch with those investing in your business.

Read more: The trend of climate innovation in New Zealand.

Be aware of current and future market conditions

When looking to raise capital and approach new potential investors, founders often look back to public market information they might have from last year. Meanwhile, investors are looking in the other direction – looking at the current state and looking forward. It pays to look to the most recent information you can find, as markets change a lot within a short time.

Being realistic about the market is vital to ensure you raise the right amount of money. When thinking about the right amount of money, investors and venture capitalists want to see evidence of awareness – that you know what the market conditions mean for growing your business.

How can you do this? By looking ahead. By making a plan. Think about how your business might play out in the next six months. For instance, it could be valuable to model a couple of different scenarios, i.e. Plan A – if things go well, it looks healthy, and a plan B that’s not as great but shows you’ll still get through.

Plan your pathway to success by extending your cash runway and reducing cash burn

It pays to look at your cash runway when making your capital raising plan. Given the current uncertainties, founders should look to having an 18 or 24-month runway beyond the usual 6 to 12 months. Think, what does your performance look like over this time? How can you show investors that you have reduced cash burn? You can’t just extend your runway by raising more money in these circumstances. Investors also want to see what you are doing to reduce your burn and extend the lifetime of what you currently have.

The reality is that there is no significant change to the way investors assess which company they will invest in. Investors still benchmark against the same criteria. What they are likely to be more interested in more challenging times is what your pathway to cash flow positive or even profitability is.

Be creative with revenue growth

Ultimately it is getting harder for entrepreneurs. You’ve got to do more with less and still get the same growth rate investors expect to see annually within their portfolio companies. You might need to think twice about hiring people who do not have a direct co-relationship with revenue growth or retention, such as product designers or data scientists.

Despite the challenges, investors will never be interested in funding entrepreneurs playing safe. Yes, there should be a certain amount of carefulness around your budget. However, you should always have that.

Companies that commit to doing their piece will raise money more successfully than those who pretend everything is rosy.

Julian So.

Times like this are a call for greater creativity. It might not be the best time to invest vast amounts of your capital into sponsoring big events or doing international road shows. So, what potential cost-cutting can you do? Utilise solutions that are free or very low cost. An example that founders should seriously think about is writing online content. It might require a bit of effort, utilising the support of a content writer or learning some creative writing skills, but it will be worth it. It’s a highly effective way to get a lot of potential business.

Don’t overlook non-financial metrics

How do you build a business that will last for many years? It comes down to business model sustainability, considering your people, the community you’re serving, and your ESG metrics – Environmental, Social, and Governance. These non-financial factors are a big focus. What are you doing in these three areas? Not just hiring and diversity, but how are you reducing emissions as a business? How are you acting more sustainably?

Growth for growth’s sake is foolish. Take your time and be strategic. Good founders will always get funded. Growing sustainably is more attractive than great statistics. Review what you are doing, how, and why you are doing things and adjust.

Make a good first impression. Stick with a simple pitch.

Investors get a lot of pitches. Sweet and simple is the best approach. Remember that a pitch stack pitch is only a first step. The purpose is to get a meeting. It’s a start of an engagement that ultimately wants to lead to due diligence. So staying nice and snappy is much better than trying to flood investors with too much information.

Utilising an external investment manager or broker is often a waste of money as the investors want to talk to you, the founder, not to a middleman.

Have a good CFO to manage your finances

If you can’t tell investors your revenue numbers, there’s a problem. A good CFO is like a personal trainer – they will look at the overall health of your business, help you set goals, teach you the vital stats to take notice of, and support you to stay on track to achieving each milestone.

Don’t underestimate or ignore the importance of understanding your finances. It is even more essential during these more challenging macroeconomic times. CFOs like us exist to provide you with a lot more clarity, especially when cash flow is tight. Working month to month makes it impossible to know when to plan your finances. We can help you stay ahead of the game by looking ahead to help spot any gaps or challenges.

Look after your mental health

This point should be your number one priority. Your mental well-being is so much more important than your business. Spoil yourself with a decent coffee once in a while. While working, remember to take breaks. Give yourself some grace. Great companies and great people will always find capital. Reach out to your networks for appropriate support. This journey wasn’t meant to be done alone.

Be careful of what news you are listening to

What we read impacts a lot on our overall well-being. There is a lot of “the sky is falling” hype from US investors. Locally in New Zealand, it pays to take the right advice for your business’s current stage and size. Most advice from overseas advisors is often geared towards mega-rounds rather than the stage most Kiwi start-ups are at.

To sum up? The best defence is an offence. Keep building a successful business that people want to invest in.

Kiwis can do this. We’re the best people in the world to seize opportunities in tough times. It’s our time to shine. We come from a market that has been capital constrained for years. We know how to do more with less. We can come up with innovative ways to acquire new customers and gain more market share while others sit back and lick their wounds. So this is a massive opportunity for Kiwi companies to go out there on the world stage and do what we do well. Let’s go.

Julian So is the Founder of CFO4U, a virtual finance service provider helping startups and high-growth small and medium enterprises (SMEs), particularly in the SaaS, DeepTech and manufacturing industries, manage their finances.

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