PROTECT AGAINST CAPITAL RAIDERS: 4 Steps to Prevent a Down Round
In periods of high liquidity organizations rarely think about “what will happen in the next funding round if…”. Optimism rules the mindset and it’s not a scenario that anyone wants to seriously contemplate.
The lessons about what happens…are now being learned the hard way. Capital Providers, even those who are close to the company, are taking advantage of the environment and founder/management lack of preparation to offer term sheets that are 90% below the last round valuation.
These valuation declines are happening even to organizations that have successful business plans and who have demonstrated success by gaining traction and growing their organizations.
Hopefully, organizations will learn the hard lessons by studying these harsh realities which generally are related to complacency and leaning into the steps that need to be taken to prevent them.
| Lesson | Steps to Prevent |
| Relying on “insiders” to fund the next round | Continuously build and maintain your capital markets brand. Send those updates – not just to your inner circle but also to the wider set of relevant potential capital providers. More interested parties will always mean better outcomes. |
| Cash runway is too short and cash flow will run out before profitability | Build budgets for the downside case and constantly know/understand when those budgets need to be implemented. |
| Fundraising will take longer than cash runway will allow | Always assume fund raising will take longer than expected and start your capital journey at least 6 months prior to capital ask. |
| Potential Capital Providers asking more due diligence questions than expected | Prepare, prepare, prepare – it is always better to be better prepared than to be underprepared. See above – start your capital journey at least 6 months prior to capital ask. |
