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At the beginning of any new year, startup founders are faced
with a choice: stay the course, grow or sell. With significant
market headwinds, soaring inflation, and an interest rate
environment that looks to be rising as far as the eye can see, many
technology businesses need help to close customers and renewals and
achieve growth. Meanwhile, multiples look to be compressed with
2023 market dynamics requiring growth vectors to be larger while
still maintaining profitability.
With the IPO window shut tight, many tech and life science
companies poised for growth or exit are contemplating a capital
raise, a merger, or a sale. Are companies who decide to raise
capital rather than explore their M&A options shortsighted?
With the current market, what should be your next move? In this
post, we share key considerations when plotting the course forward:
hold, fold or raise, which roughly translates to stay the course,
raise capital, or sell.
Stay the course
In an environment where valuations are challenged, if you
don’t raise, your startup may be forced to extend the runway by
cutting costs: either losing employees or initiatives, slow or no
growth, to stay afloat. Certainly, founders will need to look
carefully at spending to ensure that all levers to optimize the
length of survival are fully maximized.
If you are going to do a capital raise in today’s market,
here are some considerations.
- Growth. The primary driver for raising capital should be to
scale your business and get to revenue or an increase in revenue
such that your value is greater when you next raise capital or when
you sell the company. Does the new capital achieve the goal of
- Value. Raising capital should lay a clear path to increasing
your valuation by a multiple of the revenue increase that you can
achieve thanks to the capital raised.
- Equity without liquidity. Any investment will involve dilution
for current shareholders. While there may be a promise of a
‘bigger pie,’ your slice will become smaller and smaller
with every investment round.
- Takes time. The process can go on for months as potential
investors engage in “due diligence” examinations of the
founders, the solution, the total market size, and the business
proposition. Getting a green light can take time.
- Loss of control. The investment comes with the understanding
that someone is buying a stake in your business. And with that
comes not only a dilution of your economics but a dilution of
control. Investors will want to know how your business is run and
to get a block on key decisions. You will be answering to others
now with a financial stake in your business.
- Growth differences. Many venture capitalists will drive an
early-stage company to spend their investment on growing quickly,
creating the need for more working capital. In uncertain economic
times like now, it could come at a significantly lower valuation
(what we call a down-round).
- The kimono is open. When seeking funds, you must be prepared to
tell multiple people about your team’s key strengths and
weaknesses, how much of the company you still own, how you are
compensated, and what your competitive strategies are. And you will
have to hand over financial statements. Opening the kimono makes
entrepreneurs uneasy, particularly as most venture capital firms
will not sign a non-disclosure agreement until closing.
Mergers and acquisitions
Instead of raising another funding round, acquiring another
business, combining with another business, or selling the business
could be a strategic next step. Whether to merge with or acquire a
competitor is usually made when business performance is on the
upswing. At the same time, overall costs drop as each company
leverages the other’s strengths, a merger or acquisition
reaches a new market or increases market opportunities that require
a partner company to capitalize on, or the acquirer eliminates
future competition gaining more market share in their existing
Some of the benefits of selling the company now could be:
- Immediate liquidity. Many deals have a significant cash
component, which provides an immediate opportunity for CEOs and
founders to take money off the table.
- Higher valuations. Running a thorough market check and process
and targeting strategic buyers and financial sponsors should always
yield higher valuations because of the auction process. Your share
price is not pinned to a specific valuation but to what the market
will pay. On average, if you go through a well-managed process, you
will improve offers by a decent percentage because of the
competitive tension created.
- Benefits. Running a thorough market check process can yield
benefits, including improving your business model, strengthening
your strategic position, collecting invaluable data and insights
that enhance value, opening doors to new business, and, of course,
a merger, sale, or recapitalization.
There is no correct answer. Many of the factors at play are
outside of your control. Make the most of the options. Talk to your
advisors. Be flexible. There is always the next act.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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