Hunker Down or Stand Up?
When the German Wehrmacht conquered France in 1940, members of the French General Staff predicted that Great Britain would fall in just three weeks. They told Winston Churchill that Britain would “have its neck wrung like a chicken.”
Relating the story a year later in Canada, Churchill brought the house down when he defiantly declared: “Some chicken! Some neck!”
We wrote early this year about how difficult it had become for venture-funded companies to raise capital. We called it “The Great Hunker Down” because companies needed to find hyper-creative ways to cut their burn rate and preserve capital. As we enter the final quarter of the year, the time has come to boldly say: “Some Hunker! Some Down!” and stop behaving like strangled chickens.
Many companies clearly remain in hunker mode. According to the mid-year Venture Monitor published by PitchBook and the National Venture Capital Association, we in the midst of the most investor friendly market in a decade. Venture capitalists, private equity firms, angels and non-traditional investors are tightly focussed on preserving their own cash. At the same time, the total number of venture-funded companies in the US now tops 50,000. There are simply too many investment-hungry companies chasing too little cash.
Down rounds now represent more than 14% of financings and that number is expected to increase. Rescue investments are also increasing as VCs support later stage companies that have difficulty finding a profitable exit.
Many venture-backed companies are near the end of their cost cutting and capital preservation efforts. For them, there is little down left in their hunker. Inflation and rising prices aren’t exactly helping. \
So, is time to give up and embrace the floor? Not yet! There are still avenues left to explore.
Hit up the government
Rather that pursuing a career in government, perhaps it is time to simply make your contribution to the Federal deficit.
The State Small Business Credit Initiative has allocated $10B into funds that can include venture investments. The Inflation Reduction Act and the CHIPS and Science Act offer incentives for investments in deep tech and climate technologies. In short, new and existing government investment programs are at the ready if you have the right kind of product.
Find corporate capital
Many young companies shy away from corporate investments because are afraid of revealing too many trade secrets in a due diligence process. That is understandable when dealing with broadly competitive companies. Is there a potential customer or services provider that may see enough value in your products? Can you customize your technology for their market or license a portion of your product to solve a different problem?
Sell packages of licenses
SaaS companies are typically incented to sell licenses of no more than a yearly term. Other technology companies have greater flexibility. To escape the hunker down period, can you sell licenses of longer term, or site licenses, or even exclusive licenses for some time frame? This is the time to be creative.
Finance through your distribution channel
If your company sells some products through distributors or VARs, there may be and opportunity to find money there. Increase distribution fees, charge for more geographic or industry exclusivity, charge for increased customization for the distributor’s market. Some resellers may be willing to pay to increase their inventory if the deal is right.
Partner with a complementary company
Your company is not the only one in hunker mode. Is there another company in your market that may be willing to consolidate operations on a stock swap deal? If your combined run rate is significantly lower together than apart then this may be an area to pursue. Of course, one of the areas of overlap will be senior management. Don’t let your ego get in the way of survival.
To close on another WWII quote via Animal House: “Was it over when the Germans bombed Pearl Harbor? Well, it’s not over now” There’s cash out there, you just need to find it. It’s time to get back on your feet. We say: Stand up!
About MSP
Marlborough Street Partners is a team of senior operating executives that works with private equity and venture backed firms. We guide portfolio companies through their most important inflection points. Our C-level partners assess, reengineer, and when required, provide interim management to get companies on a winning trajectory. We have addressed a variety of inflection points across small, medium, and global companies. We have helped companies get to the next level organically and through mergers and acquisition.
Ken Marshall, Managing Partner