Raising Capital in a Difficult Market

By Rob Panepinto

Raising capital is a challenge for any early-stage growth company in any economic climate. Raising it in an environment of rising interest rates, banking uncertainty, and recession fears only serves to make the challenge all the more daunting. Recent data from Carta shows that the total capital raised across all private investment stages fell by 80% in Q1 2023 as compared to 2021 and Seed and Series A Valuations dropped by 13.67% and 17.07% respectively.

But many early and growth-stage companies still continue to need outside capital to grow and scale. So, if you need to raise capital, how best to navigate the current environment? A couple of thoughts:

  • Great ideas and entrepreneurs will always find funding but you may need to reset some expectations: Companies are continuing to be funded as individual investors and funds want to effectively deploy capital to drive returns and support early-stage entrepreneurs. But, per the data above, be prepared that your valuation is probably going to be lower than what your friend raised at in 2021 or 2022. Your raise will likely take longer and you will need to talk to more potential targets. The diligence will be deeper, and your SAFE/ convertible note will face more scrutiny and redlines. Spend the time to go into these discussions with a much clearer sense of what you can accept and what you cannot. Also, recognize that much of this change in value and scrutiny is not a judgment on you and your business, but the power of economic cycles and markets. It’s a good time to check your ego and sense of pride.
  • Relook at your need: I commonly see business plans where I question why the company is raising as much as they are. Sometimes it is a “cushion” against the uncertainty of the growth projections. Other times I hear that a Seed round or a Series A is “supposed to be X”, or “investors are only interested if I am raising a big number.” Perhaps that was truer in an environment of cheap money (although I don’t think so), but it is certainly not the case now. If you need money to fuel your business plan great, but spend the time to rationally analyze your business plan to establish what you truly need to execute your plan. Investors appreciate that approach as well. It gives them confidence in your understanding of your business and most do not want to unnecessarily dilute entrepreneurs.
  • Seek Other sources of revenue: Sales is always the best nondilutive capital! Have you really focused and executed on your sales strategy? Additionally, for many of you there are opportunities to fund your R&D through grants (SBIR/NSF) and the Incubator has support programs to help you apply.

No doubt the capital raising climate in terms of both amounts raised and company valuations are a headwind in this current environment, but with the right strategic thinking and operational/financial planning upfront, there is absolutely capital looking to fund big ideas and great entrepreneurs.

The University of Central Florida Business Incubation Program is a community resource that provides early-stage companies with the tools, training, and infrastructure to become financially stable, high growth/impact enterprises. Since 1999, this award-winning program has provided vital business development resources resulting in over 300 local startup companies reaching their potential faster and graduating into the community where they continue to grow and positively impact the local economy.

With eight facilities throughout the region, the UCF Business Incubation Program is an economic development partnership between the University of Central Florida, the Corridor, Orange, Osceola, Seminole, and Volusia Counties, and the cities of Kissimmee, Orlando, and Winter Springs. For the 2017/2018 fiscal years, the activities of these participating firms have helped to sustain more than 6,725 local jobs and have had a cumulative impact of over $725 million on regional GDP and over $1.3 billion on regional sales. During the same period, the program has returned more than $12.00 in state and local taxes for every $1.00 invested in the program. In addition, for every $1.00 of public investment, the firms also produced $118 of additional regional GDP and $226 of regional sales. For more information, visit  www.incubator.ucf.edu.