How to Attract Future Investments and Reduce the Likelihood of Dilution
Last year, global venture capital investments dropped by 32% to $483 billion. This is due to the current uncertain economic landscape and rising interest rates, leading investors to search for better returns on their investments elsewhere.
More recently, the collapse of Silicon Valley Bank (SVB) sent shockwaves through the market and will likely make raising funds even more challenging in the foreseeable future. These events have led to high-profile venture-backed firms, such as Klarna and Stripe, raising later-stage investment at down rounds.
Down rounds can have multiple negative implications, most notably founders having their shareholdings diluted and employees with share options being less motivated, making it harder to attract and retain talent.
However, down rounds can be avoided by implementing several practices, including building efficiencies, showing revenue growth, and taking advice from existing investors.
Showing your investors that you can do more with less demonstrates that you are using technology and resources productively in place of human capital.
This helps instill confidence that new funds will be managed and spent wisely rather than growth-at-all-costs approaches that have fallen out of favor in the current economic environment.
Implementing automated technology solutions across finance, operations, and marketing will speed up data processing, improve accuracy, and potentially save overhead due to needing to hire less staff, even if your business is scaling. Just look at Meta, one of the world’s largest publicly listed technology companies which recently laid off 10,000 employees to trim its workforce and increase overall efficiencies.
Reduced costs also help extend your runway so you can be in a stronger negotiating position.
For maximum efficiency gains, implement technology tools that can directly integrate with one another, allowing data to flow seamlessly across the organization without it needing to be entered more than once.
Show Revenue Growth
Showing consistent revenue growth after introducing efficiency measures demonstrates the continued demand for your product or service, even in an uncertain economic environment.
This shows that demand is genuine rather than spiking due to expensive and accelerated marketing activity, in effect, buying customers. And when the good times return, it’s probable that demand will increase even more, alongside the possibility of stealing market share from competitors.
Additionally, an uptick in sales can make investors feel brought into the idea that your company has a pathway to profitability that may make it more attractive to be acquired in the future.
Lean on the Expertise of Your Existing Investors
Existing investors will be heavily motivated to ensure down rounds don’t occur.
While this may allow them to access follow-on funding on the cheap, this can be a negative signifier to the market.
Many investors have had hands-on operational experience as well as have had to work with portfolio companies during turbulent economic times. Therefore, it’s worth leaning on their expertise to help navigate the business and remain an attractive investment proposition.
Another possibility is for them to open up their networks and introduce you to new potential investors, C-suite staff, and strategic partners.
If you’re struggling to keep up your business’s growth, consider expanding into new international territories.
By expanding globally, you can increase the size of your addressable market, which can be reflected in business plans and decks for new investment rounds.
Even if the activity in new international markets is limited, showing that you are operational can allow you to make assumptions around growth within financial forecasts that can be used to justify an increased valuation.
Consider Taking on Debt
A fail-safe way to avoid dilution of shares is to take on debt instead of seeking further equity investments.
This will allow founders to retain as much ownership of stock as possible, with the option of returning to the capital markets once more favorable conditions return.
If you aren’t yet profitable, you may be able to access venture debt, a specialist type of finance for high-growth companies and entrepreneurs that takes into account their unique circumstances rather than hard metrics.
Angela Brown, Director at FinFlare, a UK practice specializing in outsourced CFO services, feels that venture debt is attractive as it is “typically less dilutive than equity and can stretch equity funds as it comes into a company.”
Alternatively, Brown recommends considering convertible loan notes as “this gives existing investors an opportunity to help bridge the cash gap and gain at the next round, assuming that you don’t price the conversion at the next round and leave it as a discount.”
While the outlook of the capital markets may seem daunting, this presents a great opportunity for finetuning your company’s operations for future growth. Taking action now will increase the value of your business on a dollar-per-dollar basis.