These are challenging times for many founders and it’s these challenging times that formed the basis of our recent Survival Mode On sessions, a series of online talks and events held for our portfolio companies on how to make it through the ongoing downturn.

The latter part of the sessions was dedicated to ‘Securing your future’ and featured two talks. One was Financials 101, led by EQT Ventures’ Global Rollout Partner Marnix van der Ploeg and Operating Partner Mats Magdesjö. You can catch up on that here.

The other — put into words below — came from Gautam Nadella, our Business & Corporate Development Operating Partner. In it he took a deep dive into the fundraising and exit environments that many founders currently find themselves in, discussed the importance of keeping your options –and mind– open, and delivered some harsh truths on how vital it is to keep realistic.

Raising capital tough for cash strapped founders

Raising capital is top of mind for many founders right now and depending on your specific situation, burn and obligations, you have multiple options available to you. Never think that there’s only one path. Even in the worst case scenario, there’s a number you can go down.

But note that today the bar is materially higher to raise than it was just six months ago. In fact, in most cases, the main companies that are able secure funding are those not in immediate need of it. Whether it’s venture capital or venture debt, those are the kinds of companies that financiers really want to give cash to. They’re safer, more predictable and have multiple options available to them.

This is for a number of reasons, but primarily it’s because, with the exception of some of the top quartile of funds, many VCs are facing their own stressors and many may even be in survival mode. At EQT, we’re fortunate not to be in that situation, but what we have heard from our peers is that many are just focused on keeping their current portfolio afloat and spending their remaining funds on companies they already know and trust.

For those that do get funding, the terms are going to be a lot stricter on valuation, liquidity preference, and even milestone requirements. I think many investors, especially from the debt markets, are looking for milestones to lend against venture backed companies. This is also true to some degree for the equity markets, especially when it comes to larger or creative rounds, with convertibles and other structures that are more in favor in this market.

As an alternative to equity, I know many are looking at venture debt. Keep in mind this should not be seen as a viable option unless you have close to a year’s runway, a clear plan of use of funds, a reliable revenue stream and model and a path to profitability in the near or medium future. However, that doesn’t mean there aren’t other financing options you can pursue. There’s alternatives for some companies such as AR and revenue (ARR) based financing.

Before I talk about the sales process, I want to make one final point around raising capital — and it may be a little sobering.

If you don’t have more than nine months of runway, don’t assume it is a done deal. People are moving slower. Investment committees are going through multiple cycles and taking longer to come to decisions. Even if you’re talking to somebody at a VC or a fund that loves you, they still have to convince their team and investment committee. The bar is higher, not just for you, but for many investors within their own firms.

Runway and advisors are vital for sales

Right now, for a number of reasons, certain buyers are very open to acquisitions. In the worst case, people see great assets on sale for a discount. In the best cases, some larger companies are consolidating, and taking market share and strengthening their position. However, as we’ve seen recently, some of the largest players are also slashing their employee base quite a bit. So remember that buyers today, big or small, have very different goals and pressures than they did a year ago.

Regardless, one key requirement for a positive, likely sale, just as with fundraising, is runway. Nine months is a rough time period to count on for a clean and effective process. In that time, you can prepare your business, get your materials ready, create a list of potential buyers, reach out to them and be proactive, and then hopefully focus on terms, legal docs and finally closing.

For some the next step is choosing advisors. The right ones can open doors, bring quality relationships to the table and help you act fast. Traditionally people think this means bankers, but legal counsels are just as if not more important, depending on your situation. Keep in mind that the counsel that took you to market or helped you raise might not be the best counsel for your sale.

The final point here is, just as with fundraising, that companies that are burning cash, lacking market fit, or aren’t a tight fit for a strategic goal will be a tough to sell for buyers internally, both at the business owner (GM) level as well as for others such as the CFO.

You don’t have to check all three boxes but it will go a long way to helping you secure better terms.

Conserve cash but don’t cut too close

Whether you’re raising or selling, you need to conserve cash or at least show you can in this market. Creating a cash efficient business will have multiple downstream benefits.

All that said, you need to avoid the pressure or urge to cut too close to the bone.

Instead you need to understand your business and be honest with yourself about your P&L and balance sheet and recognize your core company’s core strengths.

Take lay-offs for example. Cutting your team is always an easy mathematical exercise to do, but it may have a downstream impact in terms of your ability to sell. You might have built a rockstar team, with a number of machine learning or AI specialists. Cutting those teams could directly impact your potential sale valuation.

Open options, open mind

In today’s economic climate, there’s no one-size fits all approach for founders. Whether you’re looking to raise or sell, you need to keep your options open and make sure you’re in a good position to optimize the outcome you’re seeking.

Whether it’s investors or buyers, people are looking at two types of fits. The fit with the market and the fit with the founder. They’re asking: What are the potential exit options? Does the math justify a fundraise?

With corporate buyers, cash burn and valuation are the key gating items. Whereas for venture investors, a high area of focus is low potential or need for continued financing.

Whichever route you’re going down, you have to conserve your cash, extend your runway and improve the path to profitability. This will only increase your options going forward and improve the outcome, whether you’re raising or selling.

Plus, you have to keep an open mind. Things may not be as bad as people say for you or your particular market, but they are certainly different than they were six months to a year ago when it comes to market interest and valuations. You have to be realistic.

So look at your business, look at your balance sheet, see what it’s really worth. Be honest with yourself about how realistic it is to have market interest and the timeframe that you’re dealing with. Think you can raise in three months? Give yourself six to nine. Think you can sell on the open market? Make sure you see some data points that prove that first.

And remember, if you are honest with yourself, you likely have more options than you think. Exploring all of them will maximize your chances of success.

As an Operating Partner at EQT Ventures, Gautam provides the portfolio with experience and focus to help management drive external growth, strengthen industry and financial partner relationships, and plan as well as execute strategic financings and exits.