It’s tough out there.  Tough to raise capital that is.  Further, things are likely to get worse before they get better.  A lack of money hanging around is not to blame.  To the contrary, in the first half of 2008 venture capitalists raised $16.2 billion, an increase of 3% in dollar value despite the number of funds raising the capital falling by 14% (see details here).  The challenge is convincing investors to be on your concept and team.

The current economic environment has VCs treading very carefully with respect to risk.  The “fast money” that seemed to be flooding the market 12 – 18 months ago has dried up, leaving for some good companies marooned, caught at a point in time needing money without the metrics to raise it.  I foresee a fair amount of capital structure rightsizing in our future.  Investors will either get on board or risk very low realizations from distressed sales.

I have empathy, for I have witnessed more than a handful of companies  try to deal with their stranded condition; their prospects quickly turning from optimistic to fleeting in a matter of months.  Deep pocketed professional investors are being forced to make difficult decisions with respect to bridging their portfolios of leaving them to seek a distressed sale or die on the vine.  Board level discord and investor dissatisfaction are sure to be the norm in some corners for the next few years as exits fail to crest invested capital.

That said, there are some lessons that have been learned from the past, that if heeded, will provide companies with a higher probability of success, even amid turbulence.  In my experience I have seen patterns emerge and I share them below.

> Appreciate that timing is everything.  What I mean by this is that, from the start, you need to have an acute awareness of when you anticipate needing capital, what the operational metrics that will enable you to raise capital at that time will need to be, and what you anticipate your company’s performance being relative to those metrics at that time.   While this is a valuable exercise in any circumstance, what it does is keep you myopically focused on what the capital markets require for success.  Additionally, it turns you into an obsessed proactive thinker about the timing and structure of your approach to the capital markets.  As an example, I recently saw a software company go to market during a period that overlapped with its annual slow second quarter.  Investors naturally paused due to the weakness in the operating results, though they could be explained away.  The company hit a cash wall due to the delay and is currently trying to attract any type of transaction.  I chalk this up, in part, to poor foresight with respect to planning and associated market timing.

> Understand what you are and where you are.  Seems simple, but this principle is violated with a high degree of frequency.  Generally speaking, missteps in this regard manifest themselves from an over inflated sense of a companies traction, quality, or attractiveness to investors.  While alignment may be real, humility is an excellent rule of thumb.  Even if it may seem tempting to try and spin your story into a masterclass  novel worthy of being on Oprah’s Book Club, it is better to present a realistic assessment of the facts told in the most favorable light.  Are you a platform or a point solution, are you a brand or a single SKU, are you a pioneer or a fast follower?  Net net, you can’t fool smart investors and trying to do so will lead to a prolonged capital raise process full of disappointments.

> Create internal alignment first.  If you have a board, you need to keep them realistically apprised of operational performance relative to the metrics needed to attract capital.   Large or influential shareholders should also be kept in the information flow and consulted.  Surprises can stop progress dead in its tracks and queer a deal.  Further, it must be clear what decisions management is empowered to make and those decisions that require the boards input.  Expectations must be realistically set regarding the potential cost of capital and the associated structure.  This is very important if you are raising your first institutional round.  Often times angel backed companies have board members whose representation is a function of the size of their historical contribution, as opposed to their value add.  In my experience I have found, at times, angels are not familiar with an institutional capital raise process and its implications.  Thus when faced with concepts that are common to raises of this type (preferences,/structure, dividends, ratchets, etc.), they encourage management to ask for terms and conditions which are out of market, delaying progress and undermining the relationship between the investor and the company.

> Keep projections realistic.  The perception of a healthy forward operating ramp is essential to attracting capital.  However, over inflation of the company’s financial prospects can undermine investor interest.  “Bottoms up” (account by account) projections are preferred to “tops down” (market sizing).  Key assumptions should be documented and kept within observed tolerances, whether with the existing company, its competitor, or a reasonable parallel from another industry that can be diligenced.  Pipeline coverage, pipeline conversion rates, and backlog must support near term forward operating results.

> Put the proper spin on the opportunity.  Materials designed to market your company, should do just that — market you.  This means presenting the business and its forward prospects in the most compelling and favorable light, given the operating statistics.  It should also meet obvious investor criticisms head on and provide the appropriate data to support the company’s prospective growth.  Aesthetics are important, but it more important to tell a clear and concise story support by ample evidence.

> Align the stars.  The most valuable thing a company can do during a capital raise process is execute. well against the plan.  Closing deals that demonstrate forward operating momentum is paramount to capturing and holding interest from institutional capital.  Conversely, deal delays undermine investor confidence and prolong due diligence.  While you will cede some value by closing deals during a due diligence period, but collecting the financial benefits in the future, it is a small price to pay to ensure success.

In the best of times raising capital can be challenging.  The bad news is these are not the best of times.  The good news is that capital is available for high quality companies.  Thinking strategically well before the capital need arrives can help you realize the best result possible, irrespective of the market backdrop.

/bryan

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