By Scott Haughton, COO at Envestors.
What is happening with Brexit is still unclear, but the clock is ticking. If we get the kind of Brexit we want, could we still find ourselves engulfed in a recession? If so, what will this mean for entrepreneurs and the investment community? Is now the right time to raise funds?
Can I attract investors during an economic downturn?
It is possible to raise funds during an economic downturn. We’ve been helping businesses raise finance since 2004. I remember sitting with an entrepreneur who needed a cash injection in the last recession, advising him to wait. Our investors had gone quiet; the market was quiet. But two months later, I ate my words. After the initial shock, angel investors recovered and while investment was harder and slower to come by, it was still there.
How to raise funds during times of uncertainty
Although start-ups should not put the brakes on any fundraising plans, we do advise a different approach to raising equity finance during times of uncertainty. For entrepreneurs seeking funding in 2019, here are our top tips:
- Practice patience
Savvy entrepreneurs know that seeking equity investment is a lengthy process. It is a marathon in good time and a full iron man in an economic downturn. Technology has enabled scaleups to have far more control over their fundraising activities; one way is to keep their funding rounds open for as long as they need to. With a climate of greater caution, this is the best way to find the optimum start-up/investor ‘fit’. There are others benefits too; a longer round allows a company to capitalise on any unforeseen successes, such as publicity, a new contract or simply some attractive ‘buzz’.
- Gain investment from a variety of sources
With banks, angels and crowd investors all being more cautious it is more important than ever to be prepared to woo investment from a variety of sources. According to Alec Lynch – CEO of DesignCrowd.com, a crowdsourcing start-up founded at the height of the last recession, ‘when the economy falters, angel investors in particular, look to move their money out of the stock market and may be willing to fund you if your prospects are promising’.To be effective, entrepreneurs must make sure they have all their documentation ready and adapted for each audience. Keep in mind that what is important to your business network in making an investment decision, may not be the same thing for angel investors. Having a fundraising platform that allows you to restrict document views on an individual basis, is really useful for ensuring you get the right message to the right potential investors.
- Focus on investor relations
Happy investors make repeat investors. Despite this, many businesses revert to business as usual after a raise and tend to forget about shareholders once the money is in the bank. It is crucialthat businesses communicate honestly and regularly with their investors. Whether it’s through an investor relations portal on a digital platform or having a dedicated staff member to keep them happy, it’s a vital factor in any start-up’s road to success.
Be sure to provide your shareholders with regular updates on business performance, good or bad: they can celebrate the good and guide you through any trouble spots. By keeping your current shareholders happy, you are potentially saving yourself a lot of hard work when it is time to raise funds again.
- Develop an international strategy
International is key and should be looked at strategically from two perspectives: How can international expansion benefit my business? And how will attracting international investment help my business to scale?
Having a presence in multiple markets allows you to spread risk; should sales slump domestically, sales in foreign markets unaffected by Brexit can bolster revenues. Keep in mind that international expansion is a long-term project and often requires significant capital, so those businesses who currently have no international operations may want to look to form strategic partnerships in the first instance.
Investment from abroad is the second point to consider when looking at internationalisation. With more caution potentially coming from local investors, international represents a large and important opportunity. China is the perfect, Brexit-proof, example. Mark Hedley, Director of the China-Britain Business Council says ‘You simply cannot afford not to look at China. There is a huge consumer demand for innovative UK tech and this has created a vibrant opportunity.’ Chinese provincial governments even have a mandate to attract high end technology companies for mutual gain; this has led to the creation of funds and incentives, such as dedicated tech parks, subsidised rent schemes and incubation/acceleration programmes.
- Have a rock-solid valuation
Downturns affect the public stock markets first. And where the public goes, the private follows. Therefore, it is crucial to have a realistic valuation. Modwenna Rees-Mogg, Editor of The Angel News, explains. ‘Businesses looking for moneyhaveto be reasonable about their valuation. Investors are looking for a company that has cashflow and an interesting structure – borrowing money that converts into shares protects the downside from a lower valuation’.
‘Companies decide what expectations to signal, and signalling has a significant effect on how new investors structure offers’, continues Todd Hicks, writing for Forbes. ‘I have seen investors walk away because the signalled expectations were too far from the price and terms they were prepared to offer. On the other hand, a company that signals confidence and an expectation that is slightly aggressive – but basically realistic – can lead a new investor to make a better first offer. It’s vital to get at least one offer and very important to get more than one. This is the strongest reason to keep expectations reasonable at the start’.
Ultimately, the message is: don’t pick a valuation out of thin air, get advice from an expert – such as a professional investment analyst – and listen. They know what they’re talking about.
There’s no real evidence that deal flow or angel appetite is reducing. ‘The hope is that Brexit creates an opportunity for SMEs, as they can be nimble and manoeuvre quicker than bigger companies which may give them an advantage’, says Mark Brownridge, DG of the EIS Association.
So, what does this all mean? Despite all the uncertainty the data suggests that the fundraising landscape is as healthy as ever. Our portfolio companies are still very attractive to our network of sophisticated investors. With the right tools – digital or otherwise – now is a good time for businesses to scale, regardless of a good, bad, soft, hard – whatever Brexit we end up with.
ABOUT THE AUTHOR
Scott Haughton is COO of Envestors, a fintech company that connects investors and scale-up companies. With its fundraising platform Envestry for Scale-ups, companies get a personalised site to promote deals, raise finance and engage with their investors 24 hours a day, 365 days a year. Envestry has raised £100m+ for over 200 companies through its own private investor network. Founded in 2004, Envestors is regulated by the FCA and has offices in the UK, the Channel Islands, the UAE and strategic partners across China. www.envestors.co.uk
Data sources for this article: Pitchbook, London & Partners, Beauhurst