Private companies raising capital from investors may have enjoyed a sellers’ market during the past seven years. But this time period—characterized by ever-rising valuations, large investment round sizes and elusive profits—appears to have reached the end. Unicorns (private companies with valuations of $1 billion or more) and Dragons (private companies raising $1 billion or more in capital) may have been tamed into submission via lower valuations or have died completely. Investors can no longer take for granted the outlandish returns that many treated as a sure thing.
How bad is it?
This market shift may be accurately labeled a downturn, and companies raising money in this environment may have to acknowledge that the party is over and adapt their pitch accordingly or find themselves shut out from the capital markets.
Direct Your Pitch Toward Strategic Investors
Inexperienced investors seeking outsized returns seem to have flooded the private equity and venture capital markets since the end of the financial crisis. Many have been burned with poorly performing portfolios and are reducing their investment activity, instead focusing on fixing and growing the companies in which they have already invested.
It may be best to focus on strategic investors, those that bring more than just money to your business. Strategic investors tend to have a longer-term investment horizon and stand to benefit from more than just the increasing equity value of your company. Many large corporations that serve as our supplier or client also have investment divisions.
Another approach is to carefully analyze the existing investment portfolio of potential investors to determine if there is synergy between their companies and yours. This can make you far more interesting as an investment target.
Expect More Investors Per Round
As investors become more conservative, they can tend to invest smaller amounts in companies to see how they use that capital before choosing to invest larger amounts.
This can mean it takes a dozen or even two dozen investors to secure the total amount of capital you seek. This can also mean additional compliance and other costs. It may be best to ensure your company is structured in such a way so important decisions won’t get bogged down waiting for dozens of investors to agree.
Anticipate Tougher Negotiations and Longer Fundraising Periods
Many investors over the past several years seem to have been primarily concerned with “FOMO” or the Fear Of Missing Out on a hot investment. This desire to avoid being left out as an investor in the next Airbnb, Facebook or Uber may have led to less stringent negotiations with companies seeking capital on the terms of the financing.
That’s pretty much over.
Companies should at least double the amount of time they estimate it will take to raise financing. During that time, most investors may expect to see your company advancing without their capital. This can allow them to evaluate your team’s performance with limited resources, which may be a good indicator of how efficiently the company will be run after an injection of fresh capital. You should also expect more pushback on control issues like board seat allocations and restrictions on the issuance of new equity to existing owners.
The most prudent course of action for companies that expect to raise money this year may be to conserve cash. Consider managing your cash outflows carefully by trimming investments and extending payment terms to your suppliers. Assuming you will raise money by a certain date—and spending your cash based on that assumption—can be dangerous.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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