Author’s Note: Insights shared here are taken from the CFO Mixer and Investor Panel held on February 2023 in Singapore hosted by Stripe, featuring a panel with Jason Edwards of January Capital and VentureCap Insights and Insignia Ventures’ Yinglan Tan, as well as a conversation with former Slack CFO Allen Shim.

Highlights

Venture-backed private companies now face a crossroads in fundraising (i.e., to raise or to not? To take a valuation hit or not? To raise equity or debt or some combination?). This is compounded by the need to extend runways to survive in the case of some companies or the pressure to capitalise on their competitive advantages in the case of others.
From the investors’ perspective, especially late-stage investors, where the correction’s impact is more severe, the bars are higher. The challenge is more pronounced for companies that raise at too high (or attractive) of a multiple and are now faced with potentially getting penalised for their last-round valuation.
The crossroads companies face in this market could be illustrated in four or five possible scenarios: Already cash-rich, get to profitability or 36-month runway, take a down round, find a buyer, or fold under pressure.
Five practices for healthier cash flow management: You can’t address what you can’t measure, robust finance function begins with solid bookkeeping, better to hire one slowly at 110 per cent than many quickly at 80 per cent, when it comes to marketing spend, get alignment on what you’re actually measuring, it’s not only equity on the table, but these alternatives (like debt, venture debt, and revenue-based financing) are not for everyone.

From fundraising heydays to fundraising correction

“What we’ve seen leading up to the correction in the public markets was that there was an enormous amount of money coming into the startup ecosystem in Southeast Asia. And that was really caused by a number of factors,” shares Jason Edwards of January Capital.

These factors included many overseas investors investing massive amounts in the region for the first time, from the likes of Jeff Bezos to Sequoia pouring as much as US$50 million into first-time meetings. This flush of money in the year post “first-generation unicorn-minting” (the likes of Gojek, Traveloka, Grab) to the pandemic-induced digitalisation rush (2018 to 2021) shifted the fundraising value chain in two ways.

Also Read: Cashflow and financing: what companies need to know

Late-stage investors were forced to move earlier because the prices went up in later rounds, while smaller funds that were able to raise much larger funds on top of the Southeast Asia potential sought to fuel larger fundraising rounds.

This capital influx closed the well-documented “growth-stage funding gap” in the region as money chased investments. Edwards adds, “For founders, at that time, it was a heyday. You just had so much money chasing investments, and people were raising more than they needed. And the valuations were, I think, higher than they should have been.”

New market, new rules

Now the script has flipped with the public markets correction, and venture-backed private companies now face a crossroads in fundraising (i.e., To raise or to not? To take a valuation hit or not? To raise equity or debt or some combination?). This is compounded by the need to extend runways to survive in the case of some companies or the pressure to capitalise on their competitive advantages in the case of others.

From the investors’ perspective, especially late-stage investors, where the correction’s impact is more severe, the bars are higher. In particular, Tan points out two key questions: “When you talk to the late-stage investors, they ask you two questions. One, are you profitable? The second question they ask you is, do you have audited financials to fundraise?”

The standards for product-market fit have also changed, as Tan adds, “…the founders that have succeeded in the past five years could raise 10 million on a PowerPoint deck and could give subsidies to grow. They will not be the founders that will succeed in the next five years because the environment has totally changed, right? You have to show economics much earlier in the process. You have to have products that actually have product market fit. And when I say product market fit, it’s not just growth, transactions need to be EBITDA positive or really unit economics positive.”

The durability of cash has also changed. Before, 12-18 months would have sufficed to ferry through another round and generate enough growth to make the markup justifiable, but now that may no longer be enough for most companies.

It also takes much longer to raise money, given the more rigorous due diligence expected by investors. Given the higher bars for fundraising vis-a-vis price adjustments, Tan advises getting to 36 months or a three-year runway, if not profitability.

The challenge is more pronounced for companies that raise at too high (or attractive) of a multiple and are now faced with potentially getting penalised for their last-round valuation. As Edwards puts it, “The challenge I think that really brings about is if you’re a good company that’s doing well at a late stage, and you’ve raised when the times were really good, you would’ve raised at a really attractive multiple. And that’s not gonna happen now. It’s all changed.

“So how do you avoid being penalised by what’s happening in the markets if you are performing well because you don’t want to have flat rounds and down rounds? So I think part of what you have to think about is managing that with the ability to raise…How do you make your runway work? That’s one thing people should think about.”

The fundraising crossroads

With this in mind, the crossroads companies face in this market could be illustrated in four or five possible scenarios. First is that if the company is already cash-rich (profitable and/or has a three-year runway), then it’s time to be aggressive. If the company is not in that position yet, the obvious alternative is to make that happen.

So second is to focus on cutting burn to create a longer runway or, even better, refocus the business towards profitability. In some cases, the company is able to safely raise a bridge round or a decently priced follow-on to add to this cash “cushion” as they refocus the business. If the company has already done these measures but is still not in a safe position at the least, taking a down round may be necessary, or considering other instruments (venture debt, debt, and other revenue-based financing instruments) as we share later in the article.

If these measures still don’t work, it may be time to find a buyer to inject a significant amount of cash in exchange for ownership of the company. Depending on the founder or management, this may actually be the optimal choice to ensure the product or service continues to be delivered and also relieve the pressure of having to navigate the bear market alone. That said, there needs to be buyer interest, to begin with.

Also Read: Bite-sized advice on cashflow in time of crisis for startups and SMBs

Ultimately not all businesses will be caught within the safety of this crossroads, and others will fold under pressure, some more spectacularly than others.

While there are external factors to account for, how an entrepreneur can make it through this crossroads begins with a realistic and thoughtful response. As Tan puts it, “…what I see nowadays is that the more mature, thoughtful founders say it’s a great time. “We got fed last year. Now we are going to, more or less, see our productivity per employee. We made the hard decisions.”

Five practices for healthier cash flow management

The crossroads just illustrated above is not a hard fast decision tree that applies to every company. This is just a simplified heuristic to illustrate the importance of building up healthy cash flows and runway if the company is to continue growing sustainably in this market.

With that in mind, we list down five practices covered both in the panel previously mentioned and in a conversation with former Slack CFO Allen Shim that followed the panel. These practices go beyond fundraising and pure finance and apply to various aspects of company building, from internal communication to hiring and marketing.

Note that these are practices (and not remedies) which means they are best applied as part of a company’s operating principles and management ethos rather than as one-off actions.

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