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Fundraising in a frothy market: why now is the time to raise

Written by Csaba Konkoly

This article originally appeared in Forbes in March 2021.

When Covid-19 hit, venture capital (VC) firms sent memos to their portfolio companies warning them to brace for impact. Companies were encouraged to reduce expenses and stash away and raise as much money as possible in case the economic impacts of the virus were dire. 

In hindsight, these predictions feel silly. For many digitally native companies, the impacts were far less than imagined, but investors and entrepreneurs couldn’t have known better. It’s impossible to predict how these events will pan out. But now that we’ve emerged from the brief Covid-19-driven recession, entrepreneurs are wondering: Is another recession imminent? Or are we at the start of a fresh economic cycle with plenty of time to raise funds?

No one can forecast the next six months. But one thing is certain: Today’s market is frothy, and entrepreneurs should take advantage of it. Now is the time to think about fundraising.

What’s a Frothy Fundraising Market?

A frothy market happens when valuations expand beyond the historical norm. Valuations can fluctuate due to the economic cycle, interest rates and other factors. In a frothy market, these valuations are on the higher end, meaning that investors have to pay a higher multiple to invest. Hum Capital is less dilutive for entrepreneurs because they’re getting a higher valuation for what they’re raising.

Why is the Current Market Frothy?

Current events have led to the perfect storm for a frothy market. Interest rates are low, which makes savings accounts unattractive. The bond market is close to historic highs. People are reallocating their money into riskier asset classes, such as private and public equities, private credit and cryptocurrencies. At the same time, new private equity funding groups, VC firms, private equity firms and private debt firms are popping up, all ready to channel funding into companies.

Companies are also able to stay private for longer due to new sources of funding, so I believe there is a greater demand for newly minted companies than what’s available. This imbalance of supply and demand is driving a market that heavily favors entrepreneurs in search of funding.

This imbalance isn’t the only reason entrepreneurs should fundraise now, however.

Why is this Fundraising Market Unique?

Prior to Covid-19, we were in a long economic cycle that began after the 2008 financial crisis and had dragged on for over a decade. The pandemic prompted a brief recession, which could have either started a new cycle in Q3 2020 or been a blip in the old supercycle.

Whether it’s an old or new cycle can indicate what the coming months and years may look like. If the old supercycle hasn’t ended, we can look back at the 1997 emerging markets crisis, early 2000s recession and 2008 financial crisis to know what will happen when it does: Financing will dry up, and companies without adequate funding will struggle to stay afloat. But if this is a brand-new cycle, then companies should have access to ample capital for the duration of the cycle.

Either way, now is the time to fundraise. If the cycle is ending, you’ll want to fill up your bank account while funding is still available. And if the cycle is just beginning, then you should fundraise aggressively while the market is frothy, knowing you’ll be well positioned for any market changes down the line.

How to Fundraise in a Frothy Market

If your company is ready to take advantage of this unique market opportunity, you need to have a sound fundraising strategy. The following steps will ensure you connect with the best investors to get the funding you need.

While there are no guarantees of funding, even in a frothy, entrepreneur-friendly market, every entrepreneur should have a plan for fundraising right now. This is a prime opportunity to get savings in the bank and be ready for whatever the next few months bring.

  1. Start by determining how much money your business needs to thrive over the next two years based on your goals and road map. 
  2. Create a target list of investors who fit your check size and have indicated interest with other investments in your industry.
  3. Prioritize that list by prestige and how easy it will be to access them.
  4. Conduct five low-risk pitches with investors lower on your list to avoid harming your reputation with a half-baked pitch.
  5. Refine your pitch based on what you learn.
  6. Get in touch with everyone else on your list, and make your pitch.
  7. Follow up vigorously until you get term sheets.

Thinking about fundraising? Sign up for a free account on Hum’s Intelligent Capital Market, and learn what kind of financing your company might be qualified for today.