Raising Capital in a Buyer's Market

by Rosalind Resnick

Ordinarily, New York is a seller's market.

It's the kind of town where you can't get a ticket to a show for less than $100, you can't get a table at a restaurant on Saturday night unless you book a month in advance and, unless you're willing to pony up the full asking price, you can kiss that penthouse goodbye.

These days, of course, it's a different story. With Wall Street shedding jobs and bankers' bonuses being downsized, New York seems to be in the middle of a giant markdown sale. Whether it's shoes, handbags or condos, there's no reason to pay retail when you can buy whatever you want for 50 percent to 75 percent off. And, while the city's bars and restaurants are still packed, you can often get a table if you call the night before.

So what do you do if you're a seller? Well, it isn't pretty. Either you sell your condo, art collection or designer dresses at a deep discount or you pull them off the market and hope for a better day.

What if you're a startup company looking to raise capital? Well, that makes you a seller and the same harsh rules of demand-side economics apply. A couple of weeks ago, I got a call from a friend from my dotcom days. Sales at his e-commerce business were booming, he told me, but the company was running out of cash to finance its rapid growth. And due to the credit crunch, the bank refused to increase the company's line of credit. His options: Raise capital from a VC at a low valuation or borrow money from a private investor at double-digit interest rates.

From talking to our clients at Axxess, I know he's not the only entrepreneur who's found himself between a rock and a hard place.

But even in a market as tough as this one, entrepreneurs do have options–once they learn to conquer their fear. Let's face it: If you didn't have something worth selling, investors wouldn't be interested in talking to you at all. And without you and your product, there wouldn't be anything for that VC to buy.

Back at NetCreations, we encountered many VCs and investors who viewed us as a vulnerable little company they could get into at a discounted valuation. When the market plunged in 1998 during the Russian debt crisis, one VC offered us $2 million for 20 percent of our company. We told him to take a hike. The following year, the market recovered and, after growing our sales from $3.4 million to $20.7 million, we went public at a $300 million market cap.

Today's market is different, of course. Even before the stock market tanked, going IPO was no longer an option for most small companies. And because our company was kicking off cash, we had the luxury of saying "no" to vulture capitalists who wanted to take our equity.

But today's startups have options, too, especially if they're kicking off cash–or, at the very least, showing that people are using or buying the products or services they've created. The rule of "traction" doesn't apply only to tech companies but to fashion labels, restaurants and consumer products companies as well.

Whatever cards you're holding, you need to play them for all they're worth. If the prospective investor sees that he's the only one you're talking to, then your negotiating leverage is going to be zero. And if you're days away from missing payroll, you're going to have to take pretty much anything that's put on the table.

Now, I'm not telling you to walk away from the money. You've got to do what you've got to do to keep your company afloat. I'm just advising you to think strategically about raising capital, reach out to as many investors as you can and present as strong a case as possible that your company has what it takes to be a winner.

Because now is not the time to be holding a "75 percent off" sale.