With the pandemic still doing its level best to hinder businesses throughout the world, it’s comforting to note that start-ups are still emerging.
Investors are absolutely willing to place their money with the right types of startups, even unicorns.
The difference today is that everyone is having to get a little more creative when it comes to securing venture capital.
Below are five ways in which companies can ensure they receive the funding they require during the pandemic.
Loans (and other debt-based investments)
It could be said that debt, always a solid instrument, is the new equity given that market liquidity has gone because of the pandemic.
It’s worth noting that debt financing tools could also help meet any new demands on existing companies too, for example if there happened to be production surges.
Simple Agreements for Future Equity (SAFEs)
For early-stage companies, SAFEs ensure that details regarding the equity stake are not negotiated until after any initial early-stage investment.
Only then does the growth path become clear.
MIT researchers, for example, have made open-source designs available for ventilators, and investors who want to support that experimentation can do so without a premature valuation.
Much like an investment in the production of a Hollywood film will eventually lead to revenue when the film is released to the public,
Revenue sharing will give investors a future stake in the company’s revenues without tying it to an equity stake.
It’s a good fit for those companies that will, in all likelihood, build to a predictable cash flow.
The initial investment is akin to how films are funded i.e. revenue is created once the film goes on general release.
Having one single early-stage investor can mean that one person’s ideas run the show, and create an imbalance that can make future fundraising more challenging.
Syndicates for early-stage ventures allow a wider array of investors to support the venture without making too many unique commitments to individual investors.
Convertible notes begin as a debt investment but give the investor the option of converting the remaining balance of the loan into an equity stake at a later date.
This makes it a good structural fit for early-stage companies, where the true value and scalability are less apparent until later in the process.