As the new year begins with the global economic slowdown, startup founders might have to take a critical decision about their business: to keep wading through the tough time, look for funds, or sell their company. Amid the market downtrend, inflation and rising interest rates, technology businesses are the ones struggling to grow and be profit-making.
In such a cloudy environment, many companies are looking for a capital raise, merger, or sale. But are companies that decide to raise capital instead of exploring their M&A options being shortsighted? In this post, we’ll take a closer look at the key considerations before taking the next step: hold, fold or raise.
Face The Tough Time
In a tough time when company valuations are plummeting, if a startup chooses not to raise capital, it may be left only with an option to implement cutting costs, such as laying off employees, and slowing or stopping growth to stay afloat. In this scenario, founders will need to carefully leverage their spending to ensure the longevity of their survival.
Raise Capital?
If a startup decides to raise capital in today’s market, there are several key considerations to take into account:
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- Growth: The prime intention for raising capital should be to grow the business and revenue so that the company’s value is in a greater position when you bag the next funding, or when the company is sold. It’s crucial to ensure that the new capital will help achieve this goal.
- Value: Raising funds should have a set vision for elevating the company’s valuation by a multiple of the revenue increase.
- Equity without liquidity: Every investment results in dilution for existing shareholders. While the total value of the company may increase, the proportion of ownership held by current shareholders will decrease with each round of investment.
- Time: Raising capital is a time-consuming process, as potential investors will not dare to invest in any business without examining the founders, solution, market size, and business proposition.
- Loss of control: With the new funds, there is an addition of new people into your company. The founders will have to not only dilute their economics but also dilute control. Investors will want to know how the business is run and will want input on key decisions.
- Growth differences: Many venture capitalists will push an early-stage company to spend the investment on rapid growth, creating the need for more working capital. In uncertain economic times, this can come at a significantly lower valuation.
- Open kimono: When seeking funds, founders must be prepared to disclose a lot of information about their team, company, and strategies to potential investors. Financial statements and other sensitive information will also be required.
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Mergers and Acquisitions
Instead of raising another round of funding, a startup may choose to pursue a merger or acquisition or to sell the business. These options are usually considered when business performance is on the upswing, and a merger or acquisition can help reach new markets, increase market opportunities, or eliminate future competition. Some of the benefits of selling include:
- Liquidity: Selling a company can provide a significant return on investment for founders and investors.
- Exiting: Selling a company can provide a way for founders to exit the business and move on to new ventures.
- Reduction of Risk: A merger or acquisition can reduce overall risk by leveraging the strengths of each company while spreading the risk across a larger entity.
In conclusion, when deciding to stay the course, raise capital or sell, it’s important to weigh the pros and cons of each option. Each one may have a different outcome depending on the company’s stage, the market conditions, and the company’s financial situation
