We are in a surging interest rate environment that is unfamiliar to the majority of participants in today’s economic activities. High interest rates translate to higher costs of both equity and debt. On top of that, we also have heightened geopolitical risk and the rise of generative AI. As uncertainty increases, many investors have slowed down investment deployment to start-ups/scale-ups (an illiquid asset class known for its asymmetric risk-return profile. )
For entrepreneurs, it’s paramount to understand the changing landscape. As the world shifts, so too must our strategies for success. If you are a founder that is planning for a fundraise as the end of runway is looming, here are a few options to consider.
The option of doing an internal round.
If you are a startup that has already raised from external investors, depending on the investor dynamic, it is worth considering doing an internal round with existing investors. The upside of doing an internal round is that they know you already and have been in the loop of all the latest developments. This enables you to close the funding round quickly and continue to focus on what’s really important, which is building the company.
The option of using debt instruments.
The valuation has taken a hit compared to the past two years yet not all the founders have re-calibrated to the new reality. From my conversations with investors and founders, I can see a clear gap between the two sides albeit it is closing slowly. To avoid giving up too much equity at a lower valuation, the less dilutive debt instruments could be an alternative option. Venture debt could work as a viable consideration for startups with > 3m+ ARR. One caveat of venture debt is that it normally comes with warrants at a specific price (typically set at the price paid for the round in question). This gives the lender the right to purchase equity (normally as a percentage of loan amount). Revenue loan is another possibility. Compared to venture debt which usually has a term of 18 – 36 months, revenue loan is much more short-term (e.g. six months) with an inherent IRR of 20% – 30%.
Other sources of funding
If your startup works in deep-tech (such as biotech, medtech or AI), then government grants can be an optimal path for you. This is not to say less IP-heavy startups can’t apply for government grants. In the UK, Innovate UK give away £100,000 to £2,000,000 grants to innovative projects (up to £25 million per annum). In Europe, there is Horizon Europe.
The option of a formal equity fundraise
If you are at an inflection point in your journey and the best option is to raise sufficient capital to seize the market opportunity to reach the next level of the game, it is no doubt that you can still succeed with a little bit of savvy and a lot of hard work. Never underestimate the power of planning, leverage both internal and external resources, be consistent in your interactions with investors and persevere no matter what.