Raising private capital in a challenging market

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 option, adds Rob Theis of World Innovation Lab, would be to take on customers as strategic investors. “That could be a very effective way of getting capital that isn’t as valuation sensitive.”

2. Seek the breakeven 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 Theis. 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.”

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3. 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 — you just want to talk about the market and your growth plans. Investors are always eager to hear what’s going on in the marketplace, and honest conversations can help founders build relationships with venture capitalists that are not just transactional in nature. Katie Storer of Blackstone Growth Equity adds, “It’s never too early to start the conversation because that allows for multiple touch points along the way. There is so much value in building a track record of credibility and doing what you say you’re going to do.”

4. 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. Founders need to perform 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 it. Overall, founders should look beyond valuations toward 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.