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February 13, 2008

Raising Money in Tough Times

The best time to SUCCEED in raising money is when money is hard to get - like now, for example. When capital is easy to get, your competitors (who are, of course, much less deserving) will have plenty of capital, too. Dumb spending or pricing by them may “force” you to do the same. In the end, easy capital may not give you any advantage at all and you pay for it with part of your company.

Capital is a coward; the sound of popping bubbles sends it burrowing under the mattress for safety. Your tech startup is not in any way related to the sub-prime housing market or to the imploding debt of leveraged buyouts. Nevertheless, if you go out for money now, you are searching for a spooked commodity. You may just be wasting your time. But, if you get the money, it puts you at a huge advantage to unfunded competitors. BTW, your competitors include everyone else jockeying for attention in the new product and service marketplace whether they compete directly with you or not.

There is a fundamental difference in what scared investors look at compared to greedy, bold investors.

Greedy, bold investors (which is what you have while bubbles inflate) don’t worry much about fundamentals; they are too busy making sure they get seats at the table – any table. That strategy actually works at the beginning of bubbles (and Ponzi schemes); those who get in AND OUT early get rich – they really do: that’s what attracts everyone else. Obviously this happens not only in high tech but also in residential real estate and tulip bulbs: it’s a fundamental part of the economic cycle.

But frightened investors (which is what you have when bubbles pop) are worried not only about the fundamentals of the company but also all the external things you, the entrepreneur, don’t control. What if your market implodes through no fault of yours? What if the time comes to raise your next round and, even though you’ve met and exceeded all your objectives, ALL the money in the world is in hiding? Oh, dear.

So, if you’ve decided to raise money now (or have no choice), you have to address these fears. Here’s a few suggestions:

  1. present a plan of reasonably achievable singles and doubles, not home runs. Remember you’re selling against fear, not to greed.
  2. present a plan which is a believable projection of what you (either as a company or as principals) have already achieved.
  3. instead of the automatic assumption that another round of financing’ll be available at a reasonable price when you need it, have a Plan B which includes going forward with NO additional financing.
  4. consider making Plan B above your Plan A. If the market opens up and the company has done as well as you think it will, you can always change your mind.
  5. show the investors how the addition of their money to your already excellent company will create a virtually unassailable position vs. potential competitors.

There is money out there; it’s just hiding. There are venture funds which have commitments for funds they’d dearly like to put to work. Credit is cheap for the most credit worthy (which doesn’t usually include startups), because credit is unavailable for everyone else and banks have to put their money somewhere. The terms you’ll get now are not as good as the terms you can get when there’s more money than ideas; but the money may be worth much more if you get it.

Good luck.

See a related post by my friend VC Rob Shurtleff on the perils of Bridges to Nowhere - on the perils of funding rounds that are too small to cross a chasm with.

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