5 steps for raising private capital in the current market

While capital is challenging to find, it is out there, especially for founders willing to explore alternative options.

In brief

• With investment capital no longer flowing as freely as it did a few years ago, founders need to explore multiple options for raising funds in today’s market.
• Founders need to focus on running a sound business, which includes achieving cash breakeven.
• Entrepreneurs need to emphasize building relationships that will yield a long-term payoff.

1. Explore other private capital options

This may include working out terms with customers and suppliers and approaching their bank to secure a larger loan. Taking this action will buy founders more runway while also enabling them to remain in control of their business. Another effective option for founders seeking additional capital is to consider taking on customers as strategic investors.

2. Align your company with enterprise partners

“Aligning yourself with these enterprise partners is a nice way to amplify your signal, without having to hire a lot of people,” says Michael Liou, formerly of Chooch. This also enables founders to find companies that are looking for the next great platform. “Founders can help build their business and even find more customers through these types of alliances,” he adds.

3. Seek the break-even point

In this environment of tight money, business owners need to take steps to ensure the survivability of their business. “You need to be able to live another day,” says Rob Theis of World Innovation Lab. “If you can at least get the cash flow breakeven and reach your milestones, then you will not be dependent on venture capital or debt.”

4. Focus on building relationships

With fewer deals getting done, investors are more likely to be open to conversations if you say you are not raising money but just want to talk. Investors want to hear what’s going on in the marketplace, and this could help founders build relationships with venture capitalists that are not just transactional in nature. Nick Kim of Upfront Ventures adds that founders need to remember that investors are “backing the founders’ team” and often look beyond the numbers. 

5. Be realistic about valuations

The pace of deals has slowed significantly over the past 12 to 18 months, along with the market, and investors are no longer rushing to do deals unless the terms are right. To that end, founders need to do their due diligence and search for investors that will help them achieve their goals. Angel or seed investors, for example, typically give founders money because they are sold on the aspirations for the business and are looking to deploy capital to help scale your business. Overall, founders should look beyond valuations to building value for the long term.

Despite the headwinds, venture capitalists and private equity investors say this remains an excellent time to start a company. Access to talent and new technology has never been better, and many promising companies have been formed during tough times. Companies that come of age during a tight economy tend to have a “grittier,” more realistic outlook on the business and are better equipped to operate over the long run.