How to raise funds in a bear market

A few weeks ago, Wonnie Lee set out to roll out an initial tour of his Korean-inspired fragrance brand, Elorea, which he founded with his wife, Su Min Park, in 2021.

A veteran of direct-to-consumer marketing — he was the head of marketing for sneaker brand Greats, which sold to Steve Madden in 2019 — Lee expected the process to be fairly straightforward: having already rolled out an initial run and shown Elorea’s proof. The next concept would be a seven-figure brand equity investment from one or more venture capital firms.

Then the market fell. The S&P 500 is down more than 20 percent since January, and is locked in hard bear territory. This, along with the Russian war in Ukraine, inflation, and persistent problems in the global supply chain, has created uncertainty among both public and private investors. After a record year in venture capital deals in 2021, global funding declined steadily in the first half of 2022. In May, investment deals totaled $39 billion, down from a peak of $70 billion in November 2021, according to Crunchbase data. When stocks go down in the public markets, the likelihood of initial public offerings and other exits for private investors also decreases. Several investors BoF spoke to said they have already reduced their deal flow this year.

For entrepreneurs like Lee, a pessimistic market makes fundraising difficult and even more urgent than when markets are booming. Instead of looking to raise $3 million, Lee and his team are now aiming for $1 million.

“Ratings have gone down across the board and everything has been shrinking,” he told me. “We remain optimistic that we will find the right investors, but the environment is certainly not helping.”

Experts say that companies in the later stages are finding conditions more difficult, because many of them raised financing in 2021 with high valuations and low expectations from investors. Now, as they seek additional capital to continue pursuing growth plans while bolstering balance sheets, the barrier is higher.

Said Bill Dettweiler, managing partner at Fernbrook Capital, an investment firm that has backed the likes of Violet Gray, La Ligne and Tory Burch. A few deals will be closed at Fernbrook by the end of July but it has no further potential investments on the table at the moment.

“There will be a fair amount of carnage over the next 12 to 18 months,” Dettweiler told the BoF. “That is why we laser focus on business fundamentals. It could be the best product in the world but if the founders do not have the discipline to run a profitable business, it will be difficult for us to invest.”

Still, the criticism is there. For example, private equity investors posted an unprecedented level of undistributed capital in February – $1.78 trillion, according to Preqin, an investment data firm.

“Investors are more rational and thoughtful,” said Arash Varen, managing director of The Sage Group, an investment bank that advises brands such as Rowing Blazers, Frankies Bikinis and Bombas. “However, not only strategic but broad private equity players are going after smaller companies in a more aggressive manner.”

There will be a fair amount of carnage over the next 12 to 18 months.

To effectively raise money in a bear market, founders must strategically target the right investors, come up with a solid business plan, consider alternative forms of investing, and prioritize survival above all else — even if it means taking in less cash. rated lower.

“Good companies will emerge in any market, and history shows that such markets can be fertile ground for the start of the next generation of great new companies,” said Farren.

Friends and family first

Michael Kolovos conceived the idea for his denim brand, Unified Unlimited, when he came out of lockdown in 2020, unable to find jeans that were both stylish and comfortable. But before approaching investors, the denim industry veteran solicited feedback from his own network of friends, former co-workers and professional partners. From there, he was introduced to Melanie Travis, founder of the swimwear brand DTC Andie, who became a consultant. The two together tuned in to their offer, getting ready to scrutinize any element of the business, and only then went to the investors.

By leveraging his network first, Colovos collected feedback to improve his presentation and business plan. “The only thing that was important to me was making sure I had all my bases covered,” he said. “If you can navigate the questions that investors are asking, it sharpens your group. If you are not able to do that, you are probably entering a very crowded market.”

Founders often choose to raise their initial capital from friends and family, who may be more willing to support a loved one’s new venture, regardless of economic circumstances.

He said that when Elorea was preparing to launch two years ago, it received its first investment from Lee’s contacts in the Korean-American venture capital community. Funded and directed, the company then secured a commitment from Strong Ventures, an investment firm focused on supporting Asian American entrepreneurs.

“It’s called the Friends and Family Tour for a reason,” he told me. “You have to convince your relatives [people] That this work is viable. It is a small amount of capital but you are able to prove the validity of your thesis.”

Research for every investor

Some founders move quickly and cast a far and wide network to attract investors, an approach that can backfire. Finding and messaging investors en masse on LinkedIn, for example, may not produce the desired results.

Callie Adams, angel investor and owner of design agency Wildes District, said she has received direct messages from LinkedIn entrepreneurs who failed to research the company’s background or background.

“I advise you to take a look at the investments [that] Certain investors did,” Adams said. “I usually support women-led companies, and I’ve had some messages from guys like, ‘This is a Red Bull men’s energy drink,’ and I’m like, ‘I don’t know why you might think this is a perfect fit.'” .

Instead of contacting investors directly, Adams recommends subscribing to newsletters published by venture capital firms, following them on social media, and joining online networks like those of the Leanluxe Brands newsletter or The 10th House, a professional group dedicated to foundations and investors.

Brands could also consider looking for funds that have recently closed a round of capital, perhaps in less popular markets, said Lindsey Taylor Wood, founder and CEO of The Helm, a venture firm and member community in venture capital that connects angel investors. some. As well as with potential targets.

“We are asking our companies to make a list of all the money they can find in the press in the last 12 months who have just raised the money, and who don’t have the largest portfolios to support them yet,” Wood said. “They have a lot of dry powder – so consider making a case for them.”

nurture relationships

‘No’ can sometimes mean ‘Not yet’.

Investors like Detwiler will keep the door open for compelling companies that aren’t good for the environment today but can make a good investment in the future. “We love meeting the founders early on in the journey and getting to know them, watching them hit their bumps,” he said. We love to help them [get into] Our network even before investing to build the relationship.”

Stay in active contact with friendly investors.

Kolovos had also reached out to an investor whose first bid lost certain points, but won by a second, a more comprehensive move — one that included input from his new advisor.

“Keep in active contact with friendly investors,” said Alex Song, investor and co-founder of Innovation Management, an incubator for consumer brands. “Hearing their perspective will help ensure that you fit in with the fundraising environment. It also helps provide updates on business progress during an economic downturn so that investors track you and prioritize a potential investment.”

But don’t be too persistent, Dettweiler warned. “If you were told ‘no’, and you kept asking, it would poison the relationship.”

Take the consolation prize

In today’s turbulent market, the perfect investment is not guaranteed. The founders should be willing to compromise or have a plan B, like funding Lee’s $1 million “bridge” instead of his full planned $3 million round.

A bridge round refers to raising capital between formal fundraising operations, such as Series A or Series B. Founders can also consider debt financing, more alternative tactics such as crowdfunding or opting for a revenue sharing agreement with companies such as Clearco, which provides financing to businesses. facing the consumer for a fixed percentage fee rather than equity — similar to a low-interest loan — or even a business grant. Many companies are exploring combinations of several options, such as convertible debt, a form of loan that is repaid through equity rather than money.

“People are creating all different types of capital,” said Jenny Gelander, a former venture capital investor and founder of Thingtesting, a product discovery and reviews platform focused on DTC. “But if you can lift a smaller round at this point, that would also be a good idea.”

Do more with less

Should no investment take place today, the priority will be to keep any cash on hand for any startup. This means sharply reducing or controlling costs, including marketing, raw materials and even the company’s headcount.

“Do a line-by-line analysis of every subscription, program, employee, advisor, and account line item you have and ask yourself if this is absolutely necessary,” Song said. “What can you do to reduce the burn today?”

Do a line-by-line analysis of each subscription, program, employee, advisor, or account item you have and ask yourself if this is absolutely necessary.

The goal, he added, is to increase the amount of time the company can continue to operate before running out of cash by at least 30 percent. “You can’t rely on fundraising marketing when you need it,” he said.

Another way to save costs might be to offer stock instead of paying providers. Adams, of design studio Wilds District, said it has accepted part-stock and part-cash deals from brands seeking their digital design services. “It makes me want to do a better job for me,” she said.

In the end, survival is the name of the game.

“A lot of founders haven’t gone into a recession before and it’s going to be a new awakening,” he told me. “But getting past it will do wonders for you.”