Agility is one of the key factors to a startup’s success. In the current climate, with interest rates rising and a recession looming on the horizon, startup valuations have seen a decline as startups adopt a “take what you can get” mentality, feeling the pressure to extend their runways and raise their next rounds.
This year alone has seen Klarna’s valuation slashed down to just US$6 billion and mass layoffs at Southeast Asian startups such as Sea and StashAway.
Lower valuations and lengthy funding cycles give startup founders less money and flexibility to spend on product launches, customer acquisition and growth. Lower valuations also put founders under more pressure to give away more equity to secure the investment they need in their next funding round.
But accepting a low valuation isn’t the only option available to startups today.
A small and agile solution to a big problem
Rather than facing a 12-18 month cycle to do a full funding round, early-stage startups can shift to agile fundraising, raising small amounts frequently and taking investments opportunistically.
Savvy startup founders already use agile fundraising to grow their businesses, meaning they spend less time holding back business growth as they need to line up the investors and do a full funding round.
With agile fundraising founders take investment before or between funding rounds. Two of the most popular methods to do that is:
- Advanced subscription agreement (ASA)
- Convertible loan note (CLN)
ASAs allow investors to instantly invest money which will convert into shares at the next funding round at a valuation determined at that future funding round. Familiar usages of this include the ‘Simple Agreement for Future Equity’ (SAFE), which remains popular in the US.
Early investors using an ASA may also benefit from a discount on the price per share paid by investors in the next funding round or by setting a cap on the maximum valuation amount at which the ASA will convert at the next round.
Meanwhile, founders benefit from an immediate funding injection that can be used to extend their runway or to invest in growth. Using an ASA, home set-up service Just Move raised US$7864445.49 (SG$11 M) from over 100 investors, tapping each one as and when the opportunity arose.
Also Read: Fundraising 101: How to approach investors
CLNs are short-term debt instruments that give investors debt into a company that can convert into equity either in the next funding round or at a specified deadline known as a longstop date.
For investors, CLNs are an attractive option as they provide an interest rate and more protection in the event of insolvency, liquidations and if the debt ranks higher than equity. In addition, investors are more likely to back their money if the company fails to raise a qualifying funding round.
Who is agile fundraising right for?
While early-stage founders may be the most obvious beneficiaries of agile funding, that’s not to say those who have already raised multiple funding rounds cannot benefit from it too.
One such scenario is when the founder has found their first investor who is willing to invest, they may use ASAs to commit the investor and access funds sooner while they search for other investors. This process can be repeated for each investor.
Through ASAs, founders obtain their investment immediately and can use the funds to invest in the startup’s growth or extend their runway.
It is generally easier for prospective investors to view a founder’s business positively when an investor is already committed and has already transferred funds.
ASAs are also useful if founders and investors cannot agree on a valuation or need more time to choose one. In these situations, ASAs give founders sufficient funding to provide them with more time to work on their startup’s valuation.
Agile fundraising works for founders who are eyeing involvement from particular investors. In cases when the founder has landed their dream investor and has a significant amount of their target raise committed, it may be wise to close the round and continue raising via mechanisms that allow for a top-up.
Other incoming investors would sign up to the same terms as the existing round. This allows founders to receive funds and put them to work immediately while continuing to fill and complete their rounds using top-ups.
Agile fundraising is an essential method for founders needing easy-access funding to stay afloat. With funding from either ASA or instant investments in their pockets, founders then can better utilise the time to focus on their business. They can also navigate delays to larger funding rounds while focusing on their startups’ growth.
In times of economic upheaval, agile fundraising could be the most feasible and durable solution for founders to raise funds. Investors, meanwhile, can stay in the game without committing huge sums amid uncertainty. It’s a win-win for both parties.
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This article was first published on September 12, 2022
The post How to inject agility into your fundraising appeared first on e27.