Don’t be Shy, Take the Money

The equity markets are no longer an easy source of capital and money is increasingly becoming more expensive. Over the past three quarters, raising capital has gone from boom to bust. Private equity, VCs and hedge funds have pulled back dramatically as interest in pre- and early-revenue stage companies has dropped considerably. However, some venture-capital firms are actively taking public market bets in battered small caps—with some growth investors now spending around 25% of their time looking for public investments, according toa recent article in the Wall Street Journal.

So, when capital becomes more expensive and the markets become a tough ground for funding, how do you find, evaluate and decide on the best financing options?

Right now, small caps should focus on finding new investors and opportunities. Portfolio managers are actively doing research internally and evaluating existing positions in their portfolios. So, if an investor offers to strengthen your balance sheet, you should take the money.

Concerns surrounding dilution, while valid during normal times, should take a back seat right now as other risks take priority. Shareholders will forgive (and forget) if an equity raise is value creating, i.e., it adds to revenue growth and meets long term financial objectives. Financing options have different dilution impacts, so make sure to read the fine print.

Debt can be a solid solution to capital restraints. Deals that allow you to draw down funds are typically preferred and seen as more fiscally disciplined. Keep in mind that growth companies who rely solely on debt to fund their expansion plans or a strategic acquisition might look attractive if they can borrow at 6%, but investors won’t find them very appealing at 12%. If you haven’t already, now is the time to get in touch with your bankers and gauge their advice as they look to shore up their funds.

At the end of the day—if you’re failing to optimize your balance sheet, you’re leaving money on the table and more than likely, it won’t be there tomorrow.

P.S. Next year – only 2 months away - could be big year for fundraising due to record amounts raised by in 2021 coupled with decreased investments in 2022, depending, of course, on the global macro picture.