As the impact of Covid-19 on society and the economy deepens by the day, many businesses face real worry and great uncertainty.
Of course, in a few sectors, such as in the healthcare, hygiene, home delivery and other direct to consumer sectors, there are companies that have fared better. In some instances, the situation has been transformational in a positive way. But in most cases, companies that were a few weeks ago solid-growth enterprises are now having to manage their finances very differently.
For many companies in need of fresh capital, the current business situation presents huge challenges. Hugo Lough, Head of Private Fundraising at the financial services firm finnCap – who are specialists in advising ambitious companies – shares his insights on the strategy for such businesses in the current environment.
What are the main considerations for businesses looking for fresh capital?
Unless you’re one of those businesses for which this situation has proven to be a positive, you’ll likely be completely focused on your operations to protect revenue as much as possible during this period.
All businesses will be facing real challenges. Debtor books have grown massively as companies stop cash going out the door. The vast majority of growth businesses will probably have flipped from wanting to raise money, to simply wanting to come out of this crisis still operating. Our advice to a recent prospect looking at fundraising – a successful small business with a great business model – was to focus on survival. Short-term, the onus must be on making use of the various government schemes where possible and focusing on the core operations of the business.
For investors, a business that comes through this period will likely have qualities that interest. So, the key thing is to ensure you still exist when this crisis passes. If you do that, it’s actually a huge tick in the box that will be used as an assessment point for funds once you look to raise funds post this period.
For those fortunate enough to be able to do so, time spent preparing is unlikely to be wasted and so we would encourage you to think about the story and spend some time preparing the relevant information for when you seek funds.
If the business is going well, is now a good time to do new fundraising? Or is it better to delay?
As mentioned, some businesses are lucky enough to be benefitting from the unique conditions and are seeing their business profit.
Even for these companies, there are challenging headwinds, particularly in not being able to do face-to-face pitches. That said, for a new business seeking funds in the medium term, there’s no harm warming up investors if done in the right way.
There are some investors still actively looking to deploy capital so there is still a chance to progress your capital raise however clearly you are less likely to drive competitive tension.
How about if you’re midway through the fundraising process?
We have some deals around the midway point. One has already incurred due diligence costs and consequently is continuing through the process. The other was just about to do due diligence, but has been put on hold – at the business’s request, not the investor’s, as they assess the impact of COVID-19 on their business.
If you’re midway, it’s going to be difficult to get it over the line unless you’ve completed most of the heavy lifting. But if you have progressed things past crucial face to face meeting and have moved forwards to the point where much if not all can be done remotely, then you may be in a good place to complete, likely at a slightly slower rate than before.
What about the funds? Do they have appetite to invest at the moment?
A lot of funds have said they are open for business, but it’s of course an uncertain environment. What’s clear is that the bar for investment is has gone up and company valuations have come down. So it would be natural to expect lower valuations and higher risk profiles under the circumstances.
The question is, if there’s an attractive business raising funds at the right price, will funds genuinely look at a brand new investment? I think it’s probably fair to say there will be a hiatus for some, but that doesn’t mean you can’t be having conversations now so as to better position you post-pandemic.
What is the Government doing to help?
The Government announced a support package of £330 billion for all businesses. Within that is the Coronavirus Business Interruption Loan Scheme which will provide Government-backed loans of up to £5 million to small and medium-sized businesses (more detail can be found here). This will be an important lifeline for many companies though I think we are still trying to understand how much of an impact this will make and how exactly it will work.
One company we know has seen its debtor book grow by about 40%. It’s a good business, still trading with contracts and customers, but the trouble is that while customers are not cancelling, they are not paying as fast or being given payment holidays/reduced service. The reality is that businesses are ensuring that every penny going out the door absolutely needs to – payment terms get stretched. That’s understandable, but it becomes problematic if everyone does it.
The cash element is phenomenally challenging and is what people are trying to work out. Everyone is cognizant that this is a cash issue rather than a fundamental underlying business issue. That’s where Government support and banks will hopefully be most useful.
