How to Raise Capital: 3 Tips to Secure Funding in Economic Downturns

Given macro conditions, many entrepreneurs, operators and business builders may feel distressed about the prospect of raising new capital.? In the past few days, I have seen social media memes making the rounds predicting the end of the VC-to-entrepreneur relationship. As growth capital and new equity rounds die by the roadside, heightened valuation-driven exits become increasingly rare, and endless liquidity dries up, business owners are facing a new reality: the music has stopped and there are countless people looking to sit down in the last chair.??

Regardless of the macro environment, there is simply a better way to raise capital.? If you are running a business that needs to raise outside capital, you should consider this sure-fire method, which is a key component of the operating playbook at Fifth Partners.

1. “Blood” Budgets –

In a timeless speech to the House of Commons in 1940, Winston Churchill spoke these powerful words, “I have nothing to offer but blood, toil, tears, and sweat…”??

The first step to raising capital, in any environment, is to create a plan that you can and will achieve. At Fifth Partners, we call this the “blood budget” because it symbolizes that the management team can figuratively sign its name in blood on the plan and that they will perform accordingly. Once this “blood” budget is established, an accurate analysis of what is needed from a capital standpoint can be derived. This creates a starting point that will provide an investor a conservative projection of what is needed before asking for an investment decision. If there is trust that the plan presented will be achieved, it becomes infinitely easier to raise outside capital.?

2. Don’t expect to receive if you are not willing to give – ?

A three-legged stool does not work if there is only one or two of the legs in place. Just because a “blood” budget shows that outside capital is needed does not mean that 100% of that gap must be filled by an outside cash injection. A sure-fire way to successfully raise the capital is to show up with the “blood” budget plan and show how the capital shortfall can be filled from all three legs of the stool – 1) outside investment 2) revenue/income enhancement and 3) cost reductions. When a plan includes shared responsibility by the investor and the operator, it creates the kind of partnership that works together to succeed. This framework works in both high-growth and accelerating opportunities as well as distressed and desperate situations. Let me give you an example from both scenarios.??

High-growth Example: I was asked to be the CEO of a high-growth real estate platform that did not quite have enough scale to be profitable. The platform was investing ahead of growth and therefore burning cash from operations. When I joined, I created a blood budget scenario (not built on upside, but on what I could commit to and deliver against in any environment) that showed the platform still needed $1.5 million in new capital before achieving self-sustainable operational growth.? Rather than ask outside investors for the full $1.5 million, I communicated this capital gap transparently with the entire company and asked all the employees for their help in coming up with ways in which we could increase revenues (not based on new growth, but organically) and decrease costs. The initial conversation was shocking to some of the employees who had no idea the company was burning cash. Any type of fear or concern about disclosing this information to the entire employee base was quickly eliminated by a collective desire to find solutions. We centered our ideas around a few key initiatives that we confidently could execute within the same calendar year. I was able to go back to the outside investors with a plan. First, I informed them that we needed $1.5M before we could be self-sufficient. However, I then shared the solutions that the entire employee base helped to construct to solve for the shortfall. We committed to deliver $500K of new revenue upside, $500K of cost reductions, and asked the investor base to contribute an additional $500K in needed capital. The outside investors had confidence in the blood budget, and they? were excited that company operators were also sharing in filling the capital shortfall with cost reductions and innovative revenue enhancements. This built tremendous momentum and trust. It also was key in transforming the culture to be one of responsibility, ownership and transparency. That company ultimately performed better than planned, driving profitable cash growth ever since.??

Distressed Example:? I was asked to be the CEO of a distressed oil field services company following the cyclical downturn in the industry after 2018. The company was in real trouble with large bank debt coming due, continuous operating losses and serious safety and insurance issues. Given these circumstances, the company had piles of past due payables, levered receivables and a real liquidity crisis. There was a significant amount of new capital needed to overcome the pending liquidity shortfall. The process of building a “blood” budget is always the first step – in distress or in growth. The operators have to know what they can deliver and have to know what those plans mean from a capital and cash perspective. Until investors and operators believe that plan, everyone is paralyzed. We put together this blood budget and? allowed everyone? to see reality in all its ugly glory for the first time. In order to get the company to a recoverable state, we needed $10M. Once that was determined, we went to work with the entire corporate team determining how much of that shortfall we could solve through organic revenue improvements and hard core cost cutting. We were able to get halfway there, primarily through cost cuts. With the plan laid out that we could figuratively sign our name in blood on – we went to the investors and presented the findings. The choice was to either shut the company down or execute our plan which would require $5M in new capital and $5M in cost cutting. We were able to secure the outside capital, and we executed precisely on our part of the plan. In less than one year, we completely turned the company around.? By the time we went into the COVID global shutdowns and negative oil environment in 2020, this company had paid off all of its outside bank debt, reversed its negative cash cycle and positioned itself to survive the 2020 depression in the oil field. Having enough liquidity and sufficient working capital cushion, it managed to stay solvent during the 2020-2021 period and now is enjoying the commodity cycle resurgence with greater prospects than ever before.

3. “If you can’t read the scoreboard, you don’t know the score…”??

Once you have a blood budget and a commitment from internal operators and outside capital, it is critical to consistently and transparently communicate progress against those plans. Regular, accurate reporting builds internal and external confidence.? If investors know that you have a credible plan that you are committed to performing against and also know that they will be informed of progress in a regular and transparent manner, you are much more likely to win. Additionally, it is much easier to course correct and find ways to overcome challenges if you are able to analyze actual performance against budgeted performance.??

Reporting on your performance is a necessary ingredient in successfully raising capital and achieving the stated results. At Fifth Partners we have a playbook for reporting against our blood budgets that is bifurcated into a cash view (strictly cash in and cash out against the budgets) that is reported weekly and a financial view (operating metrics and KPI’s) that is reported at least quarterly (and more often monthly). Investors appreciate the visibility: it builds trust and provides them the opportunity to help find corrective actions when needed. If you want to successfully raise capital, especially in difficult economic conditions, make sure you have built a system for keeping investors, employees and all other stakeholders informed regularly.?

The market for capital raising has changed dramatically in the past six months. The new realities of valuations and access to capital require a wholesale change in approach for entrepreneurs and operators. Your success rate in raising capital will be greatly enhanced if you can follow a playbook that includes the following three components: 1) Establish a plan to self-sustainability and organic cash flow that you can figuratively sign your name in blood on. Remember, the plan should be reasonably conservative, not reliant on everything going exactly right 2) Present this plan and the associated capital needed to execute against it in a manner in which the investor covers a part, as opposed to assuming the whole, of the capital shortfall.? Come up with ways in which you, as the operator and/or leadership team, will share in solving the capital shortfall through organic revenue enhancements and difficult cost cutting efforts. 3) Report transparently and consistently as you move forward. Keep the investors and all stakeholders informed and regularly make adjustments as needed to ensure that you hold yourself accountable to the blood budget.?