Fundraising in Times of Corona
Raising funds for your company is always a challenge: Defining an investment plan, the right amount and instrument, finding the right lender(s)/ investor(s) that believe in your company, going through due diligence processes, negotiating the terms and finally closing the deal. And when you think you’re finally done, reporting obligations start.
To make it even more challenging, times like the current crisis affect banks’ and investors’ behaviour and processes up to the point that funding can dry up completely during a recession!
A study from The Federal Reserve Bank of St. Louis (2016) showed that bank loan growth became negative during and after the Financial Crisis. Further, a study from The Work Foundation and Lancaster University (2013) showed that only 26% of all SMEs that requested a bank loan during 2007/08, were approved and received it. This gives you an idea on how banks and other lending institutions might react to this recession: reduce lending activity and therefore limit the exposure to new risks. Focus on their existing portfolio.
On the other hand of the financing spectrum there’s a large global Private Equity industry that has experienced many good years since the Financial Crisis. Nevertheless, industry experts expect a significant downturn in funding available as many institutional and private investors postpone investment decisions until the crisis has passed or at least until they have a better understanding of its implications.
Key considerations to keep in mind:
- Expect that some investors/ lenders will not make new investments or postpone decisions after the crisis has passed.
- Expect changes in processes, additional questions and overall, a longer due diligence process (no matter how long you have been engaging with an investor).
- Expect lower ticket sizes: Some investors will adjust their ticket sizes in order to limit their risks.
- Expect changes in other terms: Investment conditions will tend to be more conservative. For example:
- Lower valuation/ cap based on lower expected growth (for equity/ convertible note) i.e. higher ownership and decision making rights of investor
- Requirement of more collateral or equity based on higher default risk (for debt)
- Stricter covenants and more veto rights based on higher risks (for debt)
- Keep your current and potential investors up to date:
- Frequently share business updates with key results and implications of Covid-19 to show that you are operational and on top of the situation (e.g. newsletter-style emails).
- Update and share financial model including your “Covid-19 Downside Cases” (with current investors and/ or investors you are in advanced due diligence with)
- Prepare and share/ present a detailed investors’ presentation. This should include more detailed results, financial projections and scenarios and any requests that you have for your investors: How can they be helpful, do you need funding and if so, when and how much?
- Depending on your country: Include crisis-related lending programs into your thoughts. These can be governmental or private programs that aim to support the local economy with liquidity in times of crisis. Application processes can be (relatively) quick and interest rates can be subsidised.
Now that the first shock of this crisis has passed, it is a good time to prepare your business for the next few months. As I said in the beginning of this blog post, nobody knows how long this crisis will be and if it will lead to a long-lasting recession. However, observing the past few weeks’ developments and having seen many companies’ first responses followed by their medium-term strategy changes, I strongly believe that both young and mature companies should thoroughly and frequently review the points mentioned on pages 2 and 3, while never keeping global developments and trends out of sight. Try to learn as much as possible from your peers, potentially from regions that have been affected earlier than yours. Making it through the crisis should be your top priority and all your decisions and actions should reflect it!
Last, but not least I would like to thank Anika (Social Venturers) and my friend Jessica for their valuable feedback!
Hi, I’m Ann-Christin, founder of The Social Business. I am living in Antigua Guatemala and working for Pomona Impact as an Investment Associate. My passion is to work with social businesses from across the globe and invest into them. With this blog I want to expand my reach, share valuable insights and support even more entrepreneurs. Please feel free to send me any comments or questions (email below)!
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