In an uncertain environment, should your startup look for more funding?

On paper the tech industry is booming. Fintech in particular has experienced massive growth, investment, customer and employment numbers over the past few years. However, we all know that this rapid expansion comes with an asterix. World events - whether it’s the supply chain crisis, coronavirus variants or the invasion of Ukraine - have made the global economic outlook uncertain. There are also clear signs that higher interest rates combined with inflation are having a cooling effect on funding levels. CEOs and CFOs we speak to are increasingly nervous about future funding options for their businesses. 

It is therefore only prudent to think about and plan for more difficult conditions in the future. While much of what founders can do to protect their businesses is fairly intuitive - focus on your customers, retaining top talent and cut unnecessary costs - one complex question I often get asked is what to do about funding plans when market conditions are in a state of flux.

At the best of times deciding on when and how to raise capital for a startup is a complicated process. When you aren’t certain whether the economy will be much better or worse one month to the next, indecision can reign supreme. 

The easiest way to begin is to bring everything back to basics. Usually a company’s access to capital comes from three sources: cash you already have, new capital from existing financing partners, and new capital from new financing partners. For startups that already have equity investors or other financing partners, now is the time to stay in contact and plan the future together, to make sure you’re aligned on the market situation, and its implications on your business. However, it’s worth remembering that the decrease in valuations at exit will put pressure on your investors to drive more value creation per dollar invested to reach the same expected returns.

Generally startups want funding to sustain or expand their business. In periods of uncertainty - two more factors come into play - ‘fear of missing out’ and ‘insurance’. This makes perfect sense. If you want to land a big funding round you might think that this is your last chance for a while. Similarly, if you think that there might be a sharp fall in demand, it makes sense to have plenty of capital on hand to ride out the storm or take advantage of opportunities that may emerge.

Let’s talk about the fear of missing out first. Personally, I do not think seeking a ‘big round’ for its own sake should ever be a strategy. Larger rounds generally come with much more pressure and plenty of strings attached. Not all investors take a founder-friendly perspective during turbulent times. Some investors may offer aggressive terms or changes to your shareholder agreement. 

Rushing to get a round in will naturally run the risk of bad decision making. It can be easy to end up with the wrong investment partner, take bad terms, give away an unnecessary amount of equity or simply waste your precious time. Ultimately, if you have a well run business founded on a great idea, you will be able to find investment in good and bad economic times. It’s important to remember the market uncertainty will pass at some point. When the pandemic hit in Q1 2020, private venture funding only paused for one quarter before rebounding to hit record highs in the second half of 2020 and throughout 2021. Leading venture funds and alternative lenders have a lot of dry powder to finance companies that are growing and have strong unit economics. Patience can be a real virtue in this scenario.

Next, what about funding as a hedge for the future? This is a thornier issue. We can simplify things by considering where your startup is right now. The reality is that recent times have never been better for fintechs, so if your business is struggling or could be taken out by a minor shock, seeking investment without also embarking on radical structural reform of your startup is ethically dubious and simply kicks the can down the road. If your startup is in a less than secure position you may be forced into a down round (equity injection with valuation decrease). It may be your last resort, but it will run the risk of negatively impacting motivation for founders, employees, and early investors.

If your business is in a healthy position and you want capital to absorb shocks, insurance while you continue to scale, or to take advantage of any golden opportunities that might emerge (e.g. acquiring a struggling competitor or its talent) then yes, seeking out more capital makes sense - with one caveat. It shouldn’t be at the expense of your equity. 

Securing capital ahead of uncertain economic times is only a sound insurance move if it doesn’t come at the expense of your long term business goals. Going down the route of getting VC investment may carry risk if you end up not needing the funds. An uncertain economic outlook can go either way. This is why non-dilutive debt financing is perfectly placed to provide peace of mind without the complexity of a long fundraising process or an equity sacrifice. Startups that are in a good financial position will be able to get exactly the amount they need and then pay it back when the economic outlook is more settled. Some firms even offer high interest savings accounts so untouched capital can be used to make money to help offset interest payments on the debt financing. 

Finally, if this uncertainty is making you uncertain on your best next step, seek out advice from experienced advisors.