Positioning Your Start-up For Funding in a Downturn

THE ECONOMY IS facing an inflation crisis that has prompted the Bank of Canada to raise key interest rates multiple times this year. Experts predict further hikes before the year ends and people and businesses have been affected in varying ways.

As a start-up founder, you are possibly experiencing a slowdown in accessing funding due to a lack of enthusiasm on the part of investors. Venture Capitalists (VCs) have the cash to deploy but are increasingly cautious and selective about their investments.

While VCs take their time in deciding which start-ups are worth the risk, you must also rethink and reset your overall strategy, and invest in growth and value creation for your company.

Re-cast your growth thesis

Start-ups and VCs have been disproportionately focused on market penetration over the past 10 years — often at the expense of profitability. Given the uncertainty, investors are going to want assurances of a return on investment into entrepreneurial ventures and a clear path to exit.

You need to change your thinking from how to grow, to how to grow your bottom line. This will require tearing down your beliefs about the business and building up new ones.

Here’s how you can start:

• COST STRUCTURE: review your company’s expenses and the resources it distributes. As inflation persists, the prices of your products will rise and so will your expenses. Your cost structure must align with your revenue so you can make a profit.

  Understanding and accurately visualizing this in your business model will have investors considering your company worthy of their check. If you’ve previously mismanaged funds, you can retrace your steps by hiring an expert to evaluate your cost structure and create a new one to match your goals.

• CUSTOMER RETENTION STRATEGY: Your revenue is at risk, so you need to invest resources into retaining your customers, not acquiring new ones. Understand that your business’ health is directly dependent on the strength of your customer base and the relationships you build with them. Conduct a customer segmentation analysis to determine which groups of customers to prioritize and when. Also, improve on how you communicate your product’s value and manage your customer success operations.
• REVENUE GROWTH AND OPTIMIZATION: Revenue growth rate is more than just a KPI, it’s a path to sustainable profitability. It also needs to tell potential investors about how well you’re able to retain revenue and dominate the market in coming years, long after the economic uncertainty is over.

  Focus on maintaining a high gross margin, predictable revenue streams, and high customer retention to grow your revenue.

• PERFORMANCE MANAGEMENT: This should be more than just a software, but a living and breathing element that prioritizes your employees and helps you achieve strategic goals.

  When key employees leave your company, you lose expertise and send the wrong signal to investors. With a performance management process that recognizes employees, supports their career goals, and encourages feedback, you can retain employees and boost investor confidence.

• VALUE PROPOSITION: It is important to honestly and critically review the solution that your product or company provides. If an investor examines your pitch and concludes that your solution is not essential in today’s world, you could lose them.

  But if your value proposition is strong, you may only need to work on storytelling. Articulate your story clearly and concisely. Make it appeal to your investors’ emotions. It is better to under-promise and over-deliver so make sure not to exaggerate your product features and abilities.

The Best Of Both Worlds

Investor spending is under intense scrutiny while funding prospects grow dimmer. Some founders resort to exploring alternative sources of funding like borrowing. Debt comes with a lot of risk but building the health of your start-up for survival and sustainability positions you as a worthy investment. It builds your confidence and reassures investors of profitable returns.

For more information on positioning your start-up for funding, contact Chris Chapman, Managing Director, Corporate Finance at 416.596.1711 or chris.chapman@mnp.ca.