Raising capital in a stable, strong economy is difficult, but raising money during chaos is statistically impossible. Chaos may be global, limited to an industry or localized to a specific business. Chaos may originate from an economic downturn, entry of a disruptive technology into the market or a change in international tariffs laws. In any event, the relationship between a business and a capital source will materially change for the worse.
Consideration of developing a chaos capital strategy is not just an exercise. All of the conditions described above are currently present or threatening. See a recent video by Salem Ismail with Singularity University: https://www.youtube.com/watch?v=FNQSM4ipZog. I am not talking about sentient artificial intelligence taking over the earth and waging a war against mankind. I am simply looking at the consequence of disruptive innovation. In addition to general economic volatility, your business may also suffer from local disasters like floods, droughts, wild fires and other bad events. Studies show that in times of disaster, many businesses fail.
During times of economic instability, existing capital sources typically adopt higher requires to receive capital or may withdraw entirely from providing capital under any condition. Changed lending requirements may be mandated by government agencies enforcing federal and state laws as occurred during the Great Recession. In a worst case scenario, a capital source will make a call for pay down or pay off of established funding.
The time between submission of an application for capital and receipt of capital usually becomes stretched and unpredictable. The cost of raising capital grows higher. The price of money climbs. Competition for money will be amplified.
A business may find that all of these changes may cause different capital sources to change position as to which may be best.
A common capital strategy for a time of chaos is to set aside a cash reserve. This is sometimes called ‘having dry powder’. However, this strategy assumes that a business has surplus cash that can be held in reserve. If a business is engaged in startup or growth, it is far more common for a business to be working with little or diminishing cash between capital campaigns. All too often, a business is working with no cash safety net and is vulnerable to ordinary challenges in raising capital.
A capital strategy for chaotic times requires a 360 degree, full spectrum approach that seeks capital of all types from all possible sources. Each capital source is layered as a series of fall backs. When the preferred source of capital fails to deliver, the second source of capital is automatically triggered.
Development and implementation of a capital strategy cannot wait until chaos reigns. Advanced preparation is required so that transitions from one capital source to another are smooth and immediate without significant delays through a serial progression. This may require gaining approvals and placing capital sources in standby mode until needed. Iron clad contracts must be negotiated when times are good, because acceptable terms may not be available during chaos at any price.
Preparations should include maximizing the receptivity of the business to receive capital. Often a business will defer actions that would improve their image. Actions may include expanding its board of directors, establishing a board of advisors and gaining popular support within its community as the business strives for perfection.
Creative approaches to raising money should be explored. Businesses may team with other businesses to share costs and spread the risks. A business may line up guarantors, switch to assets that are more acceptable as collateral or even invest in a local bank. Even though sales agreements may be practically unenforceable, businesses may seek long term purchase commitments from their customers.
Businesses should build their chaos capital strategy as soon as possible. It should be reviewed quarterly to see if chaos is impacting capital sources, its supply chain and/or its customers. Once chaos appears, the special capital strategy should be implemented and adjusted as necessary.
Dakin Capital Guild LLC