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Published: January 11, 2023
Updated: January 11, 2023
Let's be real: raising money is always difficult, but during an economic downturn it can be even more difficult. However, it's not all bad news. Companies that are able to secure capital during tough times may be better positioned for growth in the long run.
BDO's Armand Capisciolto, National Accounting Standards Partner recently sat down with Jeffrey Stanger, co-founder of ITB solutions. Jeffrey has worked with both public and private companies on how to successfully access capital markets working alongside registered investment dealers.
During their discussion, they examined the realities of today's market, how it will affect businesses seeking capital, and the steps those businesses can take to make securing capital easier.
The market and the underlying economy have changed
Despite being in the midst of a global pandemic, capital markets remained active in both 2020 and 2021. 2021 was especially productive for investors and sellers alike, marked by record low interest rates and the robust return of institutional investors to the capital markets. Worldwide, deal-value increased from $3.7 trillion in 2020 to $5.3 trillion in 2021.
So far, 2022 has been a very different story. As we enter into the later half of the year, we've seen significant changes in economic trends: a bear market and rising inflation and interest rates. These factors have contributed to what some are calling a recession—or at least a slowdown.
The future macro environment remains uncertain for both businesses and consumers. Inflation continues to be high. To manage this, it's likely aggressive monetary policy will continue, causing interest rates to rise further. This makes it harder for businesses at any stage to secure capital and prudent cost management will be critical for all businesses.
Consider these four tips when trying to raise capital during difficult times
If you are the founder of a startup or scaleup, here are four things you can do to make your business more attractive to investors
You want to be ready well in advance of speaking with any interested investors. You'll need a presentation that is fine-tuned with your business and revenue model, historical and forecasted financials, as well as detailed financial assumptions to follow up with. Make sure you convey that you fully understand your market.
"As we know, forecasted financials never translate to the real world," Jeff Stanger shared. "But the important thing is, for sophisticated investors, it lets them know that you understand your total available market and your expenses."
You'll also want to prepare your due diligence data room before meeting with investors. A well-organized due diligence data room can take three weeks or longer to put together. If your company makes an investor wait that long, they may make a decision on another deal by the time it's ready—and you'll lose out.
"This is also true of financial statements and accounting standards," Armand Capisciolto added. "I've seen deals fall apart because they couldn't get their financial statements and audits done in time. It's important to get your house in order before someone knocks on your door with a deal."
The more prepared you are, the better impression investors will have of your company—and of its future prospects.
“During tough times, money can still be raised. It just takes more work and a larger audience,” said Jeff. “You're going to have to talk to a lot more people to find the right, sophisticated investors that understand this market.”
The more people you talk to, the better chance you have of finding someone who believes in your business plan. If nothing else, talking to investors will help you get a feel for where the market is at and what they are looking for (or not looking for). Also, the more investors you speak with the greater your chances of attracting new ones.
Investors will be especially cautious during an economic downturn, so this goes hand-in-hand with being prepared. Raising money in a tough market better prepares you for speaking with investors, you know they'll be asking tougher questions about forecasts and about the market. Being more prepared has benefits beyond the capital raise, it has benefits as you move into operations as well.
If you're raising money, don't get caught up on dilution. It's all about balance. You don't want to go too far diluting the value of your company, but you also don't want to be too conservative and not give yourself enough capital to scale.
“If investors want to put in money, let them. Don't have too much concern over dilution that it stops money coming in, because that money is key to achieving your goals,” Jeff added.
You also can't predict the future. Many companies believed that the market would soar, and money would be easily attainable after we came through the pandemic. Some companies chose to delay raising capital until after the pandemic, betting that their value would increase once the economy rebounded. But that's not the case and now those companies are raising money at much lower prices and the whole concept of dilution is out the window.
A company with a strong balance sheet and positive cash flow is more likely to attract investors than one with an uncertain future. Shilpa Mishra, Managing Director, Leader Capital Advisory at BDO Canada provided a few key considerations for improving business performance in a downturn, making it easier to raise capital:
- Stay on top of business performance and cash flows, and identify areas of weakness
- Continue to revisit capital structure and ensure balance sheets are strong
- Focus on your most lucrative customers, products, and services—implement the 80/20 rule. BDO experts can help you pinpoint that high-value 20% that is the bread and butter of your bottom line and uncover the bottom 80% that are adding operational complexities to your business
- Raising prices during a downturn can be tricky, but it may be necessary for your success
Experienced advisors can help businesses navigate the changing financial landscape by providing them with a wide array of services. Many private equity firms and alternative lenders are offering debt, so if companies know where to look—and how to reach out for funding —they'll have an easier time finding it.
“Work with advisors who understand this space and can assist in finding private equity and private debt capital,” said Shilpa. “We are doing that every day with our clients here at BDO,” she added.
A glass half-full approach
Companies that raise money in hard times need to delve deeper into their industry, business model, and market—bringing them new and more detailed insights. With this research, companies may uncover additional revenue streams, new market opportunities, or discover other pitfalls to watch out for. Businesses also need to focus on their core strengths, potentially improving performance and profits.
Don't be afraid to try. There are always investors looking for opportunities and finding success in a downturn could be good for your business.