The business world is confronted with financial issues it’s never before seen. Businesses are quarantined. Unfortunately, though your revenue has ceased, your financial obligations don’t disappear. So how do you respond?
COVID-19 is affecting all businesses, but early-stage companies are being hit the hardest. How can you survive? Is there a plan you can adopt? As we always say, financial liquidity is key — cash is king. You must carefully plan and manage whatever cash reserves you do have. And, when you can implement your next funding round, focus on obtaining mini-bridge financing to help you weather the coronavirus crisis and emerge on the other side. Sounds easy, but how do you do that?
Steps to Take While Businesses are Quarantined
Immediately update your cash budget (if you don’t have a cash budget, create one). You need to know how long your cash will survive at your current spending levels while businesses are quarantined. Examine closely how you reduce your cash expenditures.
Next, consider a mini-bridge financing with your existing investors or lenders – go to those who are familiar with your business. Many start-ups and early-stage companies will be unable to launch a new funding round during the coronavirus crisis. But we have seen aggressive, forward-thinking companies work on getting through the crisis by quietly raising smaller mini-bridge rounds from existing investors. Existing investors already believe in your business and have personal experience with it.
If you’re an early-stage company, you have a long investment horizon. Take advantage of it while your competitors cannot do so. Early-stage equity does not trade on public markets. Its value does not fluctuate with the stock market’s gyrations. If you have investors, they made a long-term investment. They still have an incentive to protect and grow that investment while businesses are quarantined.
One solution is to form your existing investors a simple mini-bridge round. You can keep it simple and raise just enough money to get you through the quarantine. This reduces the pressure being exerted on you. It also extends your time-horizon, and increases the probability of your businesses surviving the quarantine crisis.
You could issue additional securities identical to what your existing investors previously bought. Or, you can use convertible notes or simple agreements for future equity (SAFEs). These are relatively simple methods to secure investments in early-stage companies.