How fundraising changes in a crisis and what you should keep in mind

The world is in a radically different place from where it was earlier this year. In February, Covid-19 still felt like a faraway problem – something that people read about but did not expect to encounter firsthand.

Then before we knew it, the disease had exploded into a full-blown pandemic.

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Given the current environment, founders must question all their assumptions about their businesses and presume that the conviction potential investors may have had in their companies would waver during this trying time.

Accounts of Southeast Asian companies having less than three months of cash runway have increased dramatically in the last few weeks. Even those with more runway also have the difficulty of preparing for an unknown future looming in their minds.

As liquidity from an unprecedented decade of economic growth dries up, cash is once again king. Investors are much more judicious about how investments are made, focusing on business fundamentals to determine how to allocate their money.

What can startups do?

When competition for capital intensifies during a crisis, founders must do three things: take an honest and objective look at what creates a moat for their business; shore up cost structures to conserve cash; and persevere in maintaining the trust of their investors.

Only after all three are addressed would their companies be in a much stronger position to think about fundraising.

Whenever there’s a crisis, investors always stress on a company’s “defensibility.” But make no mistake: While the concept of defensibility in a new economy will certainly look different from before, the principles behind it should not change. Do customers want a certain product, whether there is an economic downturn or an upturn? If the answer is yes, then businesses that provide that product have a moat.

Shoring up cost structures is perhaps the single, most vital step to take when there is less capital in the market. To reduce the need to fundraise and extend cash runway, companies should operate with a view of what happens if they are unable to find new capital, if they have difficulties collecting receivables, and if they have limited or no access to credit over a 12- to 24-month time frame.

Another point to keep in mind is that the bulk of many startups’ operating expenses are typically driven by personnel costs. During this time, founders must consider headcount reductions along with other tactics, such as compensation cuts, role reassignments, and workday reductions. Being able to make these decisions is what differentiates great leaders from business managers.

The knee-jerk reaction of some founders to fundraise in the current climate is probably one of the worst things they can do. Developing new investor relations just before you require capital is never a good idea. With fundraising rounds realistically requiring months of work to execute, any money raised within a short period will likely be too little, too late. This underscores the importance of understanding that investor relations is an ongoing effort, not a one-off exercise in gathering investor commitments.

Maintaining relationships with existing investors

Thoughtful transparency is instrumental in maintaining a relationship of trust and conviction between founders and investors. It also helps both sides prepare for difficult conversations around renegotiation of terms or funding extensions – scenarios that a founder has to actively consider during this period. Relationships are a two-way process, and understanding each investor’s strengths can help founders leverage them to help their businesses go further.

For any CEO, it is important to set a communication system in place with their key backers – monthly updates at a minimum, with meetings scheduled more frequently for close investors. Investors should be kept updated on a company’s operating and financial health and how its leaders intend to solve problems.