By Nick Carrabbia, EVP at OAREX
The collapse of Silicon Valley Bank and Signature Bank raised concerns about the availability of capital for tech companies. These banks were two of the largest lenders to the industry, and their failure left many tech executives scrambling to make payroll and frantically contemplating the future of their businesses. The resulting questions were primarily about why the bank failed – and more immediately, how startups and other companies that rely on regional banks to secure funds would survive if there were another collapse or a wider-reaching financial crisis.
With continued concerns about an unstable banking system, inflation, and rising interest rates, lenders and investors are tightening their purse strings and minimizing liquidity. This leads to ad tech founders and CEOs seeking alternative capital solutions to help manage their finances. Specifically, they seek a solution that can help minimize their exposure to current credit risks, while ensuring they’ll have sufficient funding to cover working capital needs if their access to liquidity is cut off thanks to more bank sector shakeouts or worsening economic conditions.
While financial gurus, politicians, and the media continue to support the idea that the banking failures were outliers and primarily due to mismanagement, they are sharing one solid piece of advice. That advice is to identify and secure alternative sources of capital. In a word, it’s about diversification.
Why diversification?
Diversifying capital sources reduces risk – it is a crucial component behind driving success, especially during volatile and unpredictable times such as now. Having a loan or line of credit with a bank is an obvious solution for most ad tech businesses, but it can be hard to get when banks become more cautious and risk-averse. Even if you qualify for one, there are many other caveats to consider. Is the facility alone large enough to sustain your growth needs? Is it flexible or saddled with many restrictive covenants? Furthermore, how does it help you withstand future bank failures?
One option to diversify a company’s capital sources is to raise equity from investors. For example, funds can be provided by venture capitalists, angel investors, and even friends and family. Diversifying the sources of capital will help spread the risk and make it less likely that funds to support the company’s growth will become a barrier.
However, VCs and other investors are pulling back amid the uncertainty, especially in the tech sector. This does not necessarily mean that equity funding is unavailable, but it does mean that securing funding requires checking more detailed boxes, and the chances of an investor opening their wallet is much less likely than it was just a few months ago. If they happen to open their wallet, be prepared for a lowball offer. This begs the question, why dilute your equity now when you can wait for better valuations and use non-dilutive capital instead?
What is non-dilutive capital? Non-dilutive capital is another option for ad tech businesses looking for a flexible solution that allows them to preserve their equity while maintaining the freedom to run their business as they see fit. It is a valuable option for accelerating and supporting growth without diluting ownership or saddling your balance sheet with debt.
Some examples of non-dilutive capital options include:
- Invoice factoring: Invoice factoring is a process where a company sells its invoices to a third party, called a factor, at a discount. The factor then collects the full amount of the invoice from the customer. This provides the company with immediate access to cash, without going through the traditional lending process.
- Government grants: Government grants are available to ad tech businesses that meet certain criteria. These grants can be used to fund a variety of expenses, including research and development, marketing, and employee training.
How and When to Diversify
With the perfect storm of bank collapses and an unsteady economic environment, it is more important than ever for tech companies to not only think about finding a solution, but to actually diversify their company’s capital sources.
Some tips for diversifying capital sources include:
- Start now: The sooner capital sources are diversified, the better. This is not only about acting sooner than later but also provides time to build relationships with potential investors and lenders. When a crisis happens, scrambling to find a solution is difficult – establish those relationships now to help ease your burdens later.
- Be prepared to negotiate: When negotiating with investors or lenders, be prepared to compromise. Neither party may get the exact terms they envisioned, but the goal is to strike a deal that works for both parties.
- Be patient: It may take time to find the right options that work best for the business. But, it’s a long game, so keep exploring options to find a viable solution.
Multiple funding sources reduce reliance on any one lender – specifically during a time of more intense risk. Making these moves now will help make the business more resilient in the near and long term and provide peace of mind, knowing there is easy access to a safety net.
