Raising Capital in a Pandemic
You’re leading the business that you built from scratch. You put your health, your money and your relationships at risk to build it. You’re proud of it and you deserve to be. But you’re scared too. It’s the middle of 2020 and there’s no end in sight for the pandemic. Your business needs money, fast. Sometimes you dream of giving up, just walk away from all of this, regain some sanity. But you can’t because you’d be walking away from yourself. Hang in there.
If you need to raise capital during the worst health crisis in a century -and a well synchronized global recession- one thing is for sure. You have a challenge in your hands.
But there’s hope.
This blog is intended to help you achieve your capital raising goals. It’s informed by what I learned in the past 20 years as an investor, lender and advisor at global financial institutions, as well as more recent experiences as an entrepreneur.
What follows relates to raising money -equity or debt, for expansion or survival- from professional investors.
I will write here about the initial stages of the fundraising process leading up to and including the first few meetings with investors. I’ll go over what happens after those initial meetings in a separate blog.
Let’s start with four basic principles.
1) Write Your Strategy
Time is not on your side. To avoid wasting it, start by writing up your goals and strategy. What type of investor do you want to attract? What, apart from money, do you want from them? How much capital do you need? For what purpose? When do you need it? How many investors are you looking for? How much money from each? How will you approach investors? What information will you give them in a first contact?
You might not have total clarity on all of these questions. Do your best. Draw a clear picture of what you’re looking for. Details matter. If you’re looking for seed or early stage investors, what can they bring to the table? An expanded network in your sector? Product expertise? A stamp of approval for future rounds? More clients? Valuable coaching? This is the time to make a wish list. It doesn’t need to be long, but write it up, it will get your thoughts in order.
As you think about this keep in mind that investors are competing for new business like you and me. Money is just money. So they have to differentiate themselves in some other way. That might be in the form of sector expertise, a great reputation, deep pockets or some combination of these and other factors.
Why is this important? Because just like they can help you achieve your fundraising goals, you can help them achieve their investment goals. I know it feels asymmetric and sometimes it is, but I’d argue that more often than not, the pressure on each side is well balanced. From private equity and VC investors, to bankers and even Warren Buffett, there’s pressure. You can’t call yourself an investor if you don’t invest.
The key is knowing what you are looking for. It will improve your chances of finding investors that are a good fit. This can lead to long term strategic relationships where you can create and expand together. In other words it is about the money, but it’s not just about the money. Writing up your strategy will help you find ways to make this fundraising process more valuable for everyone involved.
2) Make a List
You’re looking for investors or lenders that are a natural fit with your company. Initially you don’t know where they are. So make a list. A Google Sheet with 100 to 200 names is a good goal if you’re looking for equity. If it’s a loan you want, the list will be shorter -still in the dozens. Get creative on the sources, don’t limit yourself to the obvious choices. If you have co-founders and partners this is a good place to brainstorm as a team.
Once you understand the type of investor you want to attract and have made a list of potential candidates, it’s time to think about them and their goals.
You’re selling something. Understanding your buyer is a priority. Do as much research as possible before your first meeting with each of them. You should know the investor’s goals and strategy, their recent investments in your sector, the stage of growth they’re focused on and every other detail that’s important to them. Check out their website, news articles, Linkedin page and Twitter accounts of key people. Get a full picture and come up with a list of questions that you can bring to the meeting.
A short word on the approach. You need warm introductions. Use all of your networking capital, this is why you built it. You’ll have plenty of chances to return favors later, don’t worry about that now.
Raising capital is driven by supply and demand. What makes your company unique? How can it become an easy decision for the investors you’re talking with? If you’re raising equity, your competitive advantage, however you define it, is a good place to start. Growth potential is the other big item. How big is your market? How big could it get? How and why is your company positioned to capture growth?
If it’s a loan you’re looking for, safety is key. Lenders think about risks and downside protections. They’re not focused on how big and profitable your company can get, or how your products will change markets and improve lives. This risk mindset might be difficult for you to empathize with, but it’s worth the effort. What are the main threats to your business? What could hurt its ability to service debt? How are you managing those risk factors?
For both upside (equity) and downside (debt) it helps if you think in terms of potential future scenarios. Thinking about it this way will differentiate you from most capital seekers. You’ll be speaking to the investor or banker in their own language. You’re telling them: I took the time to understand how you think about this.
Good investors know that they can’t eliminate risk. They’re not looking for that. They’re trying to make rational decisions while staying consistent with their chosen investment strategy. Your job is to help them in that process.
The pandemic generates an additional demand in terms of understanding how your company will be viewed. You can think of it as a 2 by 3 matrix with 6 slots. The two rows include cyclical and structural effects. The three columns have a “positive”, “neutral” and “negative” denominations. For instance, department stores would be in the second row, structural, and the first column, negative. Their business was suffering a long term decline before the pandemic; the current crisis accelerates things for them. Travel related businesses could be placed in the cyclical-negative slot. Amazon is the owner of the structural-positive. Zoom could be argued either way, a cyclical-positive or a structural-positive (the stock market seems inclined to the latter).
The degree of the impact matters too. That high end restaurant in your neighborhood is a profound, perhaps fatal, cyclical-negative. The hospital specializing in cardiovascular disease might also be a cyclical-negative, but a more manageable one.
Wherever you are in this matrix, two things matter. Knowing where you are before you start meeting with potential investors and understanding that most situations are workable.
Awareness of what your company is -what it isn’t- and who you are meeting with will get you far.
Having basic materials like a pitch deck and a financial model is necessary. But it’s not the most important thing at this initial stage. What matters now is that you communicate clearly on the previous points: what are you looking for and why is your company attractive as an investment for this particular investor or lender.
First conversations will fall somewhere in the range between useless and a slam dunk. If you were diligent about the previous steps you will have more of the useful conversations. You’ll know you’re in a good meeting when the person across the table asks thoughtful questions. They know your sector, understand your company’s stage of growth and the rationale for your capital raise. If you get the feeling that the conversation was a good exchange of ideas where both sides challenged and learned from each other, that would qualify as a very good meeting for me. Slam dunk territory would be if in addition to that, the investor or banker suggests next steps and a timeline.
Fundraising as a process
You can view these four steps as a feedback loop. After you have a few initial meetings you can go back to your strategy and refine it. You might decide to focus on a particular subset of investors and do more research on them. You can highlight the aspects of your company that are better aligned with those investors. As you go through a new round of meetings you should be having higher quality conversations.
It’s important to listen to what investors are saying in your meetings. If you did a good job at selecting the people you meet with, their feedback will be valuable -and free- advice. Take the time to understand their objections. You’ll hear things that you can’t control, such as “your company is too small/too big for us” or “we’re not investing in your sector anymore”. Don’t let that discourage you. You should also start hearing more useful feedback, things you can control. This process is comparable to getting feedback from your customers. Not all of it will make it to your product, but some will be valuable and even eye-opening.
If you don’t see progress in your conversations there might be a bigger problem. Maybe you’re trying to get a loan but don’t have the cash flows or assets to back it up. Or you’re asking for growth capital for a business that has poor long term prospects. Listen to the feedback of the highest quality investors you can talk to. They’re probably telling you what’s wrong. It might be hard to accept, but sooner is better than later.
If on the other hand you do see some progress, but it’s slow and painful, don’t get discouraged. Rejection is normal and it’s not personal. The people who agree to talk with you want to invest their capital. In most cases it is their main job and in some of those cases they will be under intense pressure to deploy capital. Don’t view them as the enemy. If they are slow, they might have a bureaucracy to deal with. If they seem inconsistent, they might be discussing the investment with partners who have different views about your company. Don’t take any of this personally. In all likelihood they are just trying to do their job as best as they can.
The current environment
The people who agree to talk to you now are doing it in the middle of a deep recession. They probably have a portfolio of existing investments and some of those investments are going through tough times. They are not immune to what is going on. Why is this relevant? Because investors who are searching for new business now are doing so consciously. They are not following the crowd. So chances are you’re meeting with high quality professionals, independent thinkers who have convinced themselves that this -a crisis- is a good time to invest. Great long term relationships can come out of these conversations.
This brings me to a final comment about mindset. If you’re leading a business my guess is that you are, well, a leader. It’s the path you chose. It has good days and bad days. Those ups and downs are tough to handle in normal times. Right now you might be experiencing an even greater share of sleepless nights. What to do about this? It’s ok to be human, but keep in mind that investors want to bet on people who can handle problems. Getting upset in one of these early meetings has no upside for you. Anticipate the emotions. You will get rejected and you will feel upset. Manage that so that it doesn’t translate into an uncomfortable moment. Walt Disney was rejected by hundreds of banks. Elon Musk had to beg for money in 2008 to keep Tesla alive. If they are not above it, neither are you. You can view it as another chance to build strength and character.
We’re all being tested now. You’ll make it through. We all depend on it. It’s people like you, who move forward in the toughest of times, that will take us to the other side. (Who else is going to do it?). So buckle up and go raise some capital. I’m rooting for you!