The worldwide pandemic caused a clear slowdown in Q2 with fewer investments and fewer exits, while the investments that did take place tended to be smaller. Despite this slowdown, entrepreneurs and investors are holding strong as they continue to uncover emerging market drivers and opportunities. At Flow Capital, our portfolio companies have remained vigilant and we continue to see an increase in demand for venture debt as VCs tighten up their wallets and founders continue to look for growth capital. Below we will discuss our thoughts surrounding market recovery and fill you in on seven tips for secure funding for early-stage companies during COVID-19.
We expect to see a V-shaped recovery for the majority of the economy with favorable market indicators already taking place, such as the stabilized and appreciating stock market. Available capital and liquidity remain abundant and companies with significant demand drivers associated with COVID-19 (e.g. FoodTech) are raising capital quickly and efficiently in large amounts.
A silver lining is we are seeing leaner, more efficient, more focused companies moving forward that are ready to take advantage of a market recovery. If you are currently fundraising or hope to start the process soon, here are seven tips to become more attractive to investors.
In order to attract interest from potential investors or to secure a loan, your balance sheet becomes a tool that can help prove your worth. A balance sheet is a financial statement that outlines your company’s assets and liabilities, giving a basic explanation of ownership vs. debt. There are four important factors that work together to make up the financial assets included in the company’s balance sheet. These are: 1) working capital, 2) cash flow, 3) capital structure, and 4) income-generating assets.
An easy way to help reduce strain on your working capital is to negotiate your company’s payables with vendors for more favorable payment terms. Smaller no advance payments, stretch out payment periods, or grant discounts will help delay or reduce the amount of cash flowing out of your company. You will end up having more working capital to pay expenses, salaries, or to reinvest back into the business. Over time as a relationship with your vendors are obtained, you will be able to negotiate better payment terms over time as trust builds and volume grows.
During a period of economic uncertainty, fixed costs can threaten a firm’s survival or severely limit its options by restricting the company’s agility. Variabilization allows you to switch over some fixed costs to variable costs. One great option is to increase option pools or to create more equity-based incentive compensation. This may be in the form of stock options available to executive team members, which are tied to milestones and is considered a variable cost.
Here’s an easy one that piggybacks off of #2. Slow down your payables. Negotiate longer payment terms and/or make upfront or in bulk purchases. Doing so can drive major price reductions with savings of as much as 50%.
Making early decisions when it comes to cutting costs and reducing burn rates is critical and rarely regretted. As a rule of thumb, you should always scrutinize every penny that leaves your bank account, but you should be especially critical of spending during a cash flow crisis. Begin prioritizing your company’s expenses by eliminating all unnecessary expenses and spending on costs that keep you operational and generate revenue.
Focus your attention and efforts on maximizing your company’s top line and getting healthy around that line of business. Maximizing survival will come with focusing on your company’s core values and a set of core customers who have money and will have significant demand for your product or service.
If you haven’t already applied for government support such as the Paycheck Protection Program (PPP), do so immediately. There are a variety of other government loan and grant options that can make it easier to keep your company’s head above water. A large portion of our US-based portfolio companies were able to successfully secure PPP loans to maintain their payrolls.
Venture debt is a great option for post-revenue companies who are looking to extend cash runway or bridge to their next equity round. While most venture debt lenders focus on VC-sponsored companies, Flow Capital supports both non-VC and VC-sponsored companies.
