You may have heard about the saying, ‘Make hay while the sun shines.’ It is applicable to all aspects of life, especially in business. If you are a startup and looking for funding your business in its early stages, then you will need to make the most before the fundraising tide ebbs out. In order to make sure that you do so successfully, you will need to consider the basic things.
According to research, it is seen that:
- There has been an unprecedented urgency of investment over the past four or five years in the entrepreneurial bio me
- The deal activity has slowed down considerably in 2016 which however leveled off somewhat during the first few months of 2017 and
- As far as the trends are concerned it continues to regress to the pre-2013 means.
If you are unsure about what such trends indicates then be informed that it is a warning sign for all entrepreneurs asking them to be more careful in making such an investment. Though this field, especially e-commerce is flourishing beyond imagination and at a fast pace, entrepreneurs must think about continuing to run their business based on the postulation that a renewed equity round will be available always on more favorable terms for the companies.
Knowledge of the market trends
Experts suggest that it is high time that the startups focus on making strategic plans so that they can meet their needs for future liquidity in a better and more effective way.
- They say that having adequate knowledge about the market trend will help them to make such a plan and ensure that it is foolproof.
- In addition to that, the experts also say that it will also help them to know the useful ways in which debt financing and all other available protective measures may engineer optionality.
- The experts further opine that this sort of preparation will provide the startups with enough confidence to survive the fierce competition.
- Lastly, they are of the view that this knowledge will teach them about the ways to overcome and thrive during the period of financial distress.
Therefore, pay attention to current as well as the upcoming market trends will help you to know about the warning signs and prevent you from in a situation of ‘blissful denial.’ You will be prepared to adapt to and adopt the market changes and operate just as required.
However, it is true that you cannot predict crisis exactly in advance but knowing and working on the warning signs accordingly will prevent you from a disaster. A few of these warning signs are:
- Rise of the deals that come with terms favorable for the investors that often contains even double or triple multiples of liquidation and liquidation preferences
- Falling of the deal activity or being flat across most sectors, geographic regions, and stages though there are few exceptions
- The difficulties that a large number of startups find in fundraising even being well-funded resulting in an early closure or forced cost-cutting measures and
- The overall exit activity remaining in a prolonged slump due to the outsized deals that prop up the exit values.
If that was not enough to ring bells and light bulbs in your head, here are a few specific statistical data that will surprise you even more.
- According to the report of Pitch Book, the investment-to-exit ratio has reached the record high with only four exits accounting for 48% of the total exit value.
- Another report of LinkedIn suggests that hiring growth is flat especially across the software sector and is down far below the seasonally adjusted target.
This means that a large pool of capital fund is interested in other asset classes due to their constant chasing for higher yields avoiding the low-interest rates in this particular asset class.
- Though these facts and figures do not specifically signify that there is an acute crisis looming around the corner, these are signs enough to create an economic headwind for the startups when it comes to their fundraising efforts.
- It indicates that they must now start to pay closer attention to the different liquidity options and develop a strategic plan while the opportunity to win a more favorable term does not die out.
The primary reason that experts have found out for the investors to be apprehensive and lose interest and taste in startup funding is the continual pressing by The Federal Reserve to normalize rates of interest ahead with plans.
Funding tunnel vision
Just like if you look to take out a debt it is imperative that you will get your free credit report to check where you stand and whether you are eligible for a particular loan, it is also essential that you know about and check out all the different available tools that may help you as a startup to meet your emergency as well as long term financing needs.
Two of the most significant tools that will help you in the process are organizational restructuring and taking on debt. However, a typical startup entrepreneur considers these to be issues and is not much inclined to consider especially if they have just done closing a fresh round of equity financing.
Both these tools may prove to be extremely valuable for the startups as these can extend a runway which is best done when any startup has a solid financial ground. These tools will provide you with benefits like helping you to:
- Identify the cost contribution
- Find better ways for cash flow generation
- Focus on the best business opportunities
- Facilitate buy-in from the affected stakeholders.
When you know the problems and identify the solutions for it, it will help you to operate in an untested and new market with more confidence.
Therefore, you are advised not to make your financial situation difficult or worse so that it turns out to be detrimental for your productivity and revenue generation. Instead focus on creating financial optionality of both equity and debt when it comes to fundraising for your startup, of course with good terms.