How to Secure Funding When It Is Hard to Find
After months of astounding valuations and a wealth of funding, venture capital (VC) investments in New York have declined – by some reports more than 40 percent. While the amount of money being invested and the number of deals have declined, it does not mean that investments have stopped. Of course, there are fewer megadeals – transactions eclipsing hundreds of millions of dollars. But look a little deeper, and you will see there is still a lot of investing taking place.
What has not changed is the amount of dollars available for investment. The difference is that investors are tightening up their processes and becoming more diligent in their evaluations. Disparities have emerged between what companies are worth and what investors are willing to pay, and closing that gap is taking longer. Investors are pushing harder on emerging companies to have more realistic valuations.
At the same time, the number of emerging companies looking for money has increased. Yet, unless these companies are uniquely positioning themselves in certain hot sectors, such as healthcare, financial services, cyber-security, data analytics, or digital advertising, or they boast a noteworthy management team with success under their collective belts, they could find it more difficult to secure funding.
Getting the Investment
So what can an emerging company do to increase its likelihood of getting early stage funding in an environment with decreasing investments? Here are five tips that can help.
- Establish a Proof of Concept. Emerging companies often have an idea of how their product or service will provide value, but their concepts are not yet proven. A proof of concept shows the viability of the company’s product or service, and by including support from noteworthy anchor clients, it shows an already established user base, increasing the likelihood of the company’s success. Until companies can show a proof of concept, investors will ask to see more.
- Utilize the Press and Social Media. Many emerging companies underestimate the importance of public relations when seeking funding. Of the deals that are closing in the New York area, many have successfully utilized the press and social media, periodically releasing information about their company to show progress and generating buzz about their product or service.
- Position the Company for Success. Having sound financials, key performance indicators (KPIs) and projections – in addition to control over the burn and cash flow needs – will make any company look more attractive to investors. Emerging companies can also do a tax analysis, which ensures that the company is addressing all multistate tax, sales tax and international tax issues (where there is an overseas component) and that they are taking advantage of any credits and incentives for which they qualify. Many companies do not take advantage of credits and incentives that are available to them, which could have saved them money for the future. Beyond tax, companies can position themselves for investment by mitigating risk, conducting an investment analysis, thoughtfully designing strategic compensation packages and having controls in place to present their capitalization table/equity structure.
- Keep Apprised of Current Market Valuations and Industry Swings. The market is ever-changing. It is imperative for emerging companies to stay current on what is happening in the market when it comes to funding. Knowing where (or if) funds are being invested, what investors are looking for, what current valuations are and what multiples are being offered will help emerging companies attractively position themselves for investment.
- Value Experience. Many emerging companies do not have someone in leadership who has been through the process of raising capital before. They need the support of someone who has been around the block, is familiar with the industry, has gone through an exit and understands the frequent challenges. It is invaluable to have an ally who understands how investors think, knows how to target and pursue investors, has established relationships and can guide the process up the ladder.
Although funding has declined, lower level funding deals are still happening. The money from New York’s venture investors has not disappeared. The difference now is that investors are using those funds more wisely. To make sure your emerging company gets funding, make sure you first address the factors above.
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