Cash Flow Management for Small Businesses

By Carrie Emslander

What is cash flow?

Cash flow is a crucial aspect of any business, as it refers to the inflow and outflow of money. It’s the lifeblood of an organization and, if managed properly, can help ensure its long-term success. In this blog, we’ll take a closer look at what cash flow is, why it’s important, and how you can manage it effectively.

Cash flow refers to the movement of money into and out of a business. It can be divided into two categories: positive and negative. Positive cash flow occurs when a business has more money coming in than going out, which is desirable. Negative cash flow, on the other hand, occurs when a business has more money going out than coming in. This can be due to seasonality, decrease in revenue, over-extension of expenses, and more.

Why is cash flow important?

Some of the top reported reasons for small business failure are connected to cash flow management, including undercapitalization, creditor problems, and slow collection of accounts receivable.

Cash flow is important because it determines the financial health of a business. If a business has positive cash flow, it has the financial stability to cover its expenses, make investments, and grow. However, if a business has negative cash flow, it may struggle to pay its bills, meet its financial obligations, and even stay in business.

Being aware of your cash flow allows you to better reach your financial goals, adds clarity, and helps alleviate concerns around money management. This is especially true for seasonal businesses or those with large cash swings.

Being aware of aging accounts receivable gives you an opportunity to attempt collection and avoids the problem of inflated profit statements or even insolvency.

Proper cash flow management helps you make good decisions and stay afloat. With proper cash flow management, you can avoid spending more than you are bringing in by forecasting any potential shortfalls. Shortfalls can be mitigated using better timing of expense or debt payments or being prepared with a backup line of credit or loan, or requiring advance payments from customers for products or services.

Tips

Managing cash flow effectively requires a combination of forecasting, budgeting, and planning. Here are some steps you can take to manage your cash flow effectively:

  1. Forecast your cash flow regularly: Regularly forecasting your cash flow can help you identify potential cash flow problems and take steps to address them before they become serious.
  2. Monitor your expenses: Keeping a close eye on your expenses can help you identify areas where you can reduce costs, freeing up more cash for other areas of the business.
  3. Improve your accounts receivable process: Making sure you get paid on time can have a big impact on your cash flow. You can improve your accounts receivable process by sending invoices promptly, following up on past due accounts, and offering incentives for early payment. In some cases, requiring deposits from customers for products or services, or offering a small discount for prepayment can go a long way.
  4. Increase your sales: Increasing your sales is a great way to improve your cash flow. You can do this by offering promotions, expanding your customer base, and improving the customer experience.
  5. Plan for the future: Having a solid plan in place for the future can help you manage your cash flow more effectively. This may include setting aside money for taxes, unexpected expenses, or future investments. Companies with tighter cash flow constraints need to look at cashflow projections on a monthly and weekly basis. Sometimes even daily.
  6. Find a mentor. An experienced business owner may be willing to share their experience with you. Groups like Entrepreneur’s Organization (EO – for companies over $1M in revenue) and EO Accelerator (companies with revenues of $250k-$1M) are great resources.
  7. Another option to solve cashflow is to work with an experienced group that not only provides financing but also has years of business experience to help guide you. At Traction Capital, we provide smart capital, are an Entrepreneurial team, and love to help companies and founders grow.

Cash flow is a crucial aspect of any business and managing it effectively can help ensure its long-term success. By forecasting your cash flow regularly, monitoring your expenses, improving your accounts receivable process, increasing your sales, and planning for the future, you can help ensure that your business has the financial stability it needs to succeed.

If you or someone you know is interested in raising capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our resources page for future blogs and startup events.  

Top 15 VC (Venture Capital) Terms Every Founder Needs to Know

By Ellie Pigott

1. Liquidation Preference

Liquidation Preference refers to the order of which the investors in the company get paid in the event the company goes under. Typically the order is as follows; senior debt (long term loans- commercial banks, etc.), subordinated debt (seed funds, angel investor, venture capitalist and friends/family), preferred stock (investors other than the founder), and lastly common stock (founders and employees).  

 2. Deal Flow 

Deal flow describes the rate at which new investment opportunities are being presented to a company. Typically deal flow is evaluated quarterly but can be broken down and measured month to month or week by week. If a firm is experiencing high deal flow, this can make the environment more competitive for startups and make it more challenging to get a deal.  

 3. LOI (Letter of Intent)  

An LOI or Letter of Intent, is used in the later stage of a deal process. These documents can be very broad or in some cases very detailed. The more detailed LOIs outline what a deal would look like and present the terms for both parties to agree on. A VC will offer this document to a startup they’re pursuing and once the terms can be agreed on and signed, the firm will begin the process to move the deal to close.  

 4. Terms Sheet 

Similar to the LOI, the term sheet outlines the specifics of the deal. Depending on the depth on the LOI, the terms sheet may include a lot of the same information. A terms sheet will include details on equity, liquidation, board structure, dividends and more.

5. Pre Money vs Post Money Valuation  

Pre Money valuation is the value of the company before the investment is made. This number is typically negotiated between the VC and the startup, as it helps to determine what percent equity the VC firm will receive. Post Money Valuation is the value of the company after the investment (pre money value + investment amount = post money value). For example, if a startup is valued at $1.5 million before the investment, and a firm invests $1 million, the pre money value is $1.5 million and the post money value is $2.5 million. When calculating ownership of the company, VC’s will base their ownership on the post money valuation.  

 6. Burn Rate  

Burn Rate refers to the rate at which a company deploys their capital. To calculate burn you can take your starting balance – existing balance / your number of months. Although burn rates vary depending on industry, a general rule of thumb is to keep your burn rate near 1/12 of your available cash. Ensuring you have enough cash on hand to make it through the year.  

7. Churn Rate  

Churn is often used with SaaS companies and apps, as it refers to the customers they’re losing at a monthly or annual rate and the associated revenue being lost. For an existing company, 6-8% annual churn is average, but for startups an average annual churn is closer to 45% (which breaks down to about 7% monthly). 

 8. Bootstrapping  

Bootstrapping is slang for being completely self-funded, or “pulling oneself up by one’s bootstraps,” meaning building the business from the ground up only using personal or family funds. This can also be shown through the flexing of personal skills and knowledge to build the business with existing resources.  

 9 . Convertible Note 

A convertible note, otherwise known as convertible debt, begins as debt in the form of a loan from an investor and later is converted to equity. The number of shares received depends on the amount of the loan, plus interest that has accrued, and whether a conversion discount is in place. A conversion discount would allow the investor to purchase the shares at a cheaper price than the current valuation, giving them an incentive for loaning money at an earlier stage. This form of financing can help the deal move quicker while also helping to avoid fees on either party (investor or investee).  

 10. Due Diligence  

Due diligence is the research done by the VC firm before investing in the company. This can be done at multiple stages in the process, and will typically include research on competitors, founder experience, traction and more. Due diligence in the later stages of a deal process will also include more financial and legal vetting.  

11. Down Round  

A down round refers to an additional raise after the previous use of funds did not yield the expected performance, or there was a change in the market. Since the company did not perform as well as expected, this next round of shares will be sold at a cheaper price. This can be seen with early startups who set their valuations too high and can range all the way to highly successful and established startups whose growth has slowed after increasing at an exponential rate. A down round is viewed as negative by prior investors as their investment has now been “marked down” or decreased in value. It is important to have the “right” priced valuations to avoid a down round.  

 12. EBIT/EBITDA Multiple 

EBIT and EBITA stand for Earnings Before Interest, Tax, Depreciation and Amortization. When determining a company’s trajectory from a growth standpoint and a return on investment perspective, the EBIT/EBITDA multiple can determine its value. The multiple used can be calculated in a variety of different ways including taking the enterprise value divided by EBIT, or by looking at the multiples of companies in the same industry or who use the same model. EBIT/EBITDA is typically used in more mature companies raising funds or exiting, as opposed to earlier stage companies raising a Seed or Series A round and may still be burning cash and not yet profitable. 

 13. Entrepreneur in Residence  

An entrepreneur in residence is an individual with experience successfully running a business, who supplies a startup with advice and knowledge on how to help their company. This can be done as a hired mentor or even make the entrepreneur in residence the temporary CEO. In the case of becoming the temporary CEO, the EIR is usually brought on by a VC firm either at the time of the investment or acquisition.  

 14. Use of Capital 

Use of capital is exactly what it sounds like, it describes how the capital will be used. This is extremely important when talking to investors because they want to know that you have a plan for using their funds in an effective manner. This can be a variety of things but the most common are growing the team through hiring, investing in building out the platform or product, scaling production, etc.  

 15. Option Pool 

Option pool describes the set of shares set aside for current and future employees. Giving key employees a small share in the company is often done as part of their employment package because startups typically cannot afford larger salaries. This helps startups remain competitive with larger companies who may be able to offer higher employment compensation.  

 

If you or someone you know is interested in raising capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our Resources page for future blogs and startup events.  

Top 10 VC (Venture Capital) Terms Every Investor Needs to Know

By Ellie Pigott

1.  Limited Partner (LP)

Limited Partner (otherwise referred to as an LP), is the term for an investor who is a member of the fund. This means they have agreed to the terms of the fund, and thus are investing their money but do not have control over the management of the fund. 

2. General Partner (GP)

The General Partner is in charge of managing the money in the fund. This person is both an investor and a full-time employee of the fund. They oversee raising the capital and make the decisions where to allocate it. Although the GP does have the most say or control in a fund, in most cases they are still governed by a board which helps to approve the highest cost decisions or commitments made above a certain threshold. 

3. PortCo 

Like many terms in VC, portco is an abbreviation. Portco, otherwise known as a portfolio company, is a company that the fund has invested into. Many VCs have a portfolio page on their website where you can gain more info on the success of their portcos. If you can’t find a public portfolio of a VC you’re looking to invest in, ask if they can provide you with a few examples. 

4. Cap Call (Capital Call)

When someone agrees to be a limited partner in the fund, they agree to contribute a certain amount of money. However, this money is usually not taken all at once, but instead in (often) pre-determined increments over the life of the fund. A cap call is the term used for the announcement and collection of that predetermined amount. Because LP’s sign contracts agreeing to the terms of the fund, these cap calls can be enforced by law.  

5. Committed Capital

As mentioned in the definition of cap call, the committed capital is the amount an LP signs on to contribute to the fund. Committed Capital is the total amount the LP is contributing, and funds will almost always have a minimum amount of committed capital required to participate in the fund. 

6. IRR (Internal Rate of Return)

Projected IRR or Internal Rate of Return is an equation used to calculate how profitable an investment may be. This equation tracks both time and cash flow to determine annual growth for the investment. Since Committed Capital is called over time and not paid in all at once, IRR is typically higher with Capital Calls than if Committed Capital is paid all up front. 

7. Sidecar (SPV)

A sidecar or otherwise referred to as a special purpose vehicle, is used to raise additional capital for a PortCo with a small pool of investors. SPV’s are run by the same lead investor as the existing capital. Investors who have already invested in the existing capital through the VC fund are also eligible to contribute additional capital in the sidecar. These types of SPV’s are typically raised because the Portco has a growth need arise or because the lead investor is not covering the entirety of the raise. 

8. Carry

Carry is the term for the percentage of the profits the General Partner receives, in addition to a small management fee. The profits help the GP to cover overhead costs to help run the fund. For example, paying their team who helps identify new portcos and manage existing ones. Carry also helps incentivize good performance for the GP. Carry is typically not paid to the GP until all principal investments have been returned to the LP.  

9. Accredited Investor

To become an accredited investor, you need special designation achieved by meeting certain financial regulation criteria. There are different requirements depending on the investment, and to qualify, they may take into account your gross income, net worth, asset size, and professional experience. Being accredited means you need less protection by the SEC and it allows you to engage in investment activities not registered with financial agencies. 

10. Management Fee

A management fee is a fee charged to LPs to manage their investment in the fund. This fee is annual but is typically taken out during the cap calls. Each fund can determine their individual management rate but most charge between 2-3%. This fee helps account for operational cost and the diligence that goes into each of the investments.  

If you or someone you know is interested in raising capital or you’re interested in investing options like private equity or venture capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our Resources page for info regarding our potential investor events! 

How to Grow Your Startup During a Labor Shortage

By Ellie Pigott

In the midst of a labor shortage, seeking the right talent for your startup may seem intimidating. But you might be in luck.

People are leaving their jobs because they want something new and different, and working for a startup that shares their values could be a strong point of attraction.

Attracting good talent doesn’t always have to mean fancy offices and catered lunch. We’ll outline five key things to keep in mind when hiring during this unpredictable time.

1.     Offer Remote Work

In a post-pandemic world remote working has become very normalized. In 2022, statistics show nearly 60% of Americans work at least part time remotely. While it is important to have rapport between team members, offering optional remote is a great way to keep up with today’s changing societies.

If you haven’t yet integrated this or you’re wary of committing to fully remote, offer some in between options. Set a two or three day a week minimum for in office work and let your work force determine the rest of the week.

Even if you may think your employees prefer working in person, giving them the power to choose allows them to feel like a more valued member of your company.

However, be careful when offering this, don’t throw around promises you can’t keep. If the kind of work you’re seeking requires someone fully in person, be upfront.

2.   Develop a Strong Mission, Vision and Values

More than ever, people are seeking work that they align with, not just from a skillset perspective, but with their mission as well.

Has your company dedicated time to construct your mission statement? If so, is that mission statement somewhere potential employees can see it?

Displaying your mission statement on your website or LinkedIn is a great way to show people what you’re about when they’re considering applying. It’s important that your mission statement actually holds your values. A generic mission statement isn’t any better than not having one at all.

Take Patagonia for example, their mission is to “build the best product, cause no unnecessary harm, use business to protect nature, and not bound by convention”.

People strive to work for their company not just because they have openings in product design, but because their personal values align with that of the company’s.

By having a mission statement or core values and showcasing them in your job description, you’ll be more likely to find candidates who align with your work. This then increases the chances of them sticking around.

3.   Don’t Sacrifice Values for Convenience

When the need for labor is high it can be easy to sacrifice values for a quick and easy hire. However, this type of convenient mistake can often lead to high turnover and dissatisfaction by both the employer and the employee.

Your company’s values are at the core of what you do, if you don’t have employees that align with them it’s impossible to be confident in their ability to deliver on those values to your customers.

Remember, values are soft skills that greatly affect someone’s work but can’t be taught. On the contrary, hard skills may be more directly related to the specific position but can be learned by someone who may not be an expert.

If someone is a good fit for your company but lacks some of the hard skills in your job description, consider finding ways to incorporate that needed hands-on learning in their first month of onboarding.

4.  Include Statements to Deter People

A large contributor to the labor shortage is employees being unhappy in their jobs or employees leaving their jobs shortly after accepting due to being misled.

Oftentimes the job description does not fit the reality. To help avoid this turnover many businesses are turning to “what we’re not” statements.

This sets realistic expectations with those applying. Some companies will even go as far as to include statements like “you are not the right fit if you…”. While it may sound harsh to some, you’re saving yourself time in the interview process by weeding out people who don’t meet your company’s needs.

By including “what we’re not” statements, you’re establishing a level of trust and honesty with the applicants. You’re being upfront in ways other companies aren’t and you’re saving them time that they could use to apply for jobs they might be a better fit for.

5.   Provide More Than a Salary

Fair compensation and benefits are a must, but nowadays employees are looking for more.

Consider what additional unique advantages your company can provide. This could be strategic growth, individualized mentorship, extra certifications relevant to the role, and more.

The level at which a potential employee feels they can grow as an individual may be the deciding factor between your company and another. Being “taken care of” by an employer has an entirely new meaning than it did 20 years ago.

Your company might be their next job but it’s unlikely to be their last. They want to know your company is dedicated to their growth. And when the time comes, they’ll be prepared for whatever comes next.

The Next Step

With a toolkit of good practices in mind it’s time to start drafting your job description. Remember that transparency and honesty are both at the core of finding a great new member of your team.

By being open about your company’s values, growth opportunities and offerings, you’ll be sure to find a candidate who aligns well with your role.

If you have specific questions about hiring or how to help your startup succeed, reach out to us at peyton@tractioncapital.com.

5 Tips to Prepare Your Startup for a Recession

By Ellie Pigott

While a recession looms overhead, many entrepreneurs fear what’s in store for their startups and small businesses.

The Oxford Dictionary defines a recession as “a period of temporary economic decline during which trade and industrial activity are reduced” and in the last 160 years, recessions have occurred roughly every 4 and a half years. Meaning if your business plans to stick around, the likelihood you’ll have to endure one eventually is inevitable.

Although the word “recession” may sound dooming, these trying times have resulted in some of the world’s most successful and recognizable startups.

With these tips we’ll make facing a recession less stressful and help you gear up to come out on top.

1. Watch the Books

It may sound obvious at first, but for a company in its stride, it may not be top of mind. When you’re doing well it’s easy to ignore the nitty gritty financial details, but when you’re worried about the fate of your business, it’s time to pay attention.

This is the time to trim the fat and get lean.

Every cut counts, but you may be unsure of where to start and what to cut. A good place to begin is conducting a self audit. This allows you to see exactly where you’re putting your money.

Some easy cuts to start with could be subscription services your company pays for.

Depending on your type of industry, you may be able to save a few dimes in production. These saves can quickly add up, but be sure not to sacrifice the quality of your deliverable.

2. Re-Evaluate Your Loans

You would never wait and try to buy insurance until you’re already admitted to the hospital, and if you did, you wouldn’t be successful. The same goes for trying to renegotiate your loans during a recession.

Ideally it’s best to talk with your lenders before a recession is even in the air. However, with a recession looming, it’s better to speak with your lenders beforehand and try to work with them for a better rate.

Remember, you’re on the same team and neither of you wants to see your company default.

If you’re looking for more personal financial security, opening a business card instead of using your personal account is a great way to rely on loans without any effect on your personal credit score.

It’s important to remember these things take time. That’s why talking to your bank as far out as possible gives you the best opportunity to get a hold of your finances before a recession starts.

3. Diversify Your Services

You might think tough times call for sticking to what you know. While that can be true, it’s not always enough to keep you afloat.

Many great companies started with different intentions in mind. Take the 50 billion dollar company Shopify for example, they started as an online snowboard retailer and now run proprietary e-commerce all over the world.

Think about ways you can use your existing infrastructure to provide alternative services to your customer.

This not only allows for multiple streams of revenue, but it mitigates your risk in the event the market takes a turn.

In some markets, diversification can also mean differentiation. If your company can continue to innovate and grow, you’ll have a huge advantage on your competition.

4. Focus on Existing Customers

In a recession everyone will be trimming the fat, don’t let that fat be your business.

Take the time to talk with your customers, listen to what’s going well and what’s not. At the very least this will show your dedication to their business and ideally form a personal connection.

Holding on to your existing customers during hard times will allow some consistent cash flow while you focus on small steady growth.

While building these relationships, you may hear patterns begin to form. Take these to heart and let them mold the leanness of your business. There may be areas of your business you didn’t realize could be trimmed with little to know effect.

5. Don’t Stop Marketing

When looking for ways to save on cash, marketing might seem like an easy cut. But don’t be quick to jump to conclusions.

Marketing is the gas that powers your sales force. If you’re still not convinced marketing is worth the money, start tracking your marketing ROI.

Cutting your marketing budget without doing any research could lead to an unexpected drop in sales.

If you’re still looking for a way to save a few bucks, try committing more energy to your content marketing campaign. Content marketing refers to things like your social media, blogs or other resources on your website. These can be great ways to attract customers organically. On average, this type of marketing generates over three times as many leads for a fraction of the cost.

Before jumping all in, try experimenting with content marketing while still supporting your outbound marketing efforts. This will allow you to see what works and what doesn’t before allocating more resources.

Looking Forward

Regardless of the condition of the market, balancing the books, re-evaluating your loans, making the most out of your existing infrastructure, forming valuable connections with your customers and pinpointing what’s effective in your marketing, are always important.

The most successful way to make it through a recession is by being proactive, not reactive. By focusing on what’s working best, doing business in a start-up doesn’t have to be scary.

If you’ve got specific questions about how to help your startup succeed, reach out to us at peyton@tractioncapital.com .

5 Types of Alternative Investing

By Ellie Pigott

For many, when they hear the word investing, they think of the stock market, retirement funds or maybe even crypto. But the possibilities don’t stop there. For those whose lifestyle can allow a less liquid investment vehicle, alternative investing is a great option. There are several vehicles to choose from including private equity, venture capital, angel, real estate, storage unit investments and more.

Here are several investment vehicles we have come across.

1. Private Equity

While private equity takes many forms, the overarching definition is investing in private companies either directly or through a fund. This can be done to gain shares of the company or to acquire the company.

Unlike the stock market, these investments have very long holding periods. Private equity firms typically exit between 3-5 years, but investors can expect waiting up to 10 years for their return.

Over the last 20 years, returns in private equity have averaged higher than that of the S&P 500. The current average PE return in the U.S is just above 10%.

2. Venture Capital

One of the many forms of PE is Venture Capital. This investment vehicle still invests in private companies but the companies receiving investments are startups with large potential for growth.

As opposed to the start-up going to the bank to receive a loan or running a crowdfunding campaign, the VC option provides the startup with both capital and expertise.

This can be extremely beneficial to entrepreneurs, especially those who lack industry knowledge in a certain area. For example, if the founder has a great vision for the company but doesn’t know much about accounting and finance, the VC firm would help fill that knowledge gap.

VC funds are typically 10 year hold periods that can extend to 12 years depending on their needs. Investors become Limited Partners (LP) in the fund and can experience tax benefits such as 1202 stock treatment, reducing overall tax liability.

VC Fund managers act on behalf of the fund to source investment opportunities, perform due diligence on companies and founders, and assist startups to growth and eventually exit.

At Traction Capital, we help connect investors with our portfolio companies that are directly related to their expertise. For some this can be mentorship, a board seat, or more, depending on the investor’s level of interest and availability.

3. Angel Investing

Similar to Venture Capital, Angels also invest in startups. This type of alternative investing is for individuals with high net worth, who provide the funds directly to the company. In most cases the capital is in exchange for equity of the company.

Because such high capital is needed, Angels typically need to become an accredited investor before investing. This ensures a level of stability and prohibits just anyone from claiming to be an Angel.

As opposed to a VC or PE fund, where a firm is doing the due diligence, this type of investment normally requires your own time and research.  To spread their risk, many Angels invest in several startups at the same time, across various industries.

Another way Angels lower their risk is by going in on a deal with multiple angels. This requires a network of trusted, well backed individuals. There are Angel networks for investors to join, some which provide deal flow, industry experience and educational opportunities.

4. Real Estate

During the pandemic the real estate market skyrocketed, but even prior, the market had been consistently climbing. Over the last 10 years the market has grown an average of 5% year after year, not including 2021, in which the market grew 17%.

Across the board, annual rate of return in real-estate has averaged 10% over the past 10 years. Investing in real estate can take many forms.

The more hands-on forms include owning a rental property or flipping a house. However, if you are looking for a hands off vehicle where your money can grow over time, a Real Estate Investment Trust, Mutual Fund, Limited Partnership, or Investment Group might be a better fit.

REITs are publicly traded shares of a commercial real estate company that owns many properties. In a Real Estate Investment Group, you buy into the fund by purchasing property, that property is then managed by the investment group. Lastly, a Real Estate Mutual Fund is an investment vehicle requiring less capital. This type of fund is more liquid, as they primarily invest in REITs, instead of purchasing property.

5. Storage Unit Investments

Just as VC is a division of PE, Storage Unit Investments are a division of Real Estate. There are several ways to go about investing in a storage facility, the main three being REITs, Self-Storage Syndicate and buying a property.

The first is the least risky and arguably requires the least amount of day-to-day work. Because REITs are publicly traded, they have strict regulations that help protect against fraud. Like any REIT, storage unit investments are great for consistent growth over a long period of time.

The second option is a syndicate. This allows investors to pool their money with other investors to purchase a facility that would then be managed by the sponsor of the fund. Like a VC fund, the investors would be LP’s, with basically no liquidity, but high potential returns.

The third option is to buy the storage unit facility and manage it yourself. Although the profits are consistently climbing, this requires a lot of upfront capital, as well as management knowledge. This option also requires the most hands-on work, as opposed to the others, which allow your money to sit and grow over time.

Next Steps

With so many alternative investing options, deciding on the right one can be challenging, confusing, and time consuming. If your lifestyle can allow illiquidity, alternative investing is a great way to not only diversify your portfolio, but to get involved with a founder or project that you enjoy and can help grow. The most important thing to keep in mind with any of the options is history and legitimacy of whatever investment vehicle you choose. Always be sure to do your research and collect all relevant data before committing any capital.

Traction Capital is a private equity and venture capital firm based near the Twin Cities. Unique from others in our industry, our entire team is made up of entrepreneurs.

As a team full of entrepreneurs that have successfully run and exited companies, we are well equipped to advise and assist our portfolio founders with any challenges that might arise.

If you or someone you know is interested in raising capital or you’re interested in alternative investing options like private equity or venture capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our Resources page for info regarding our potential investor events!

Startup Valuation Trends 2022 [what founders need to know]

By Ellie Pigott

Over the last two years we’ve watched as Covid has turned our world upside down. Virtually every industry was affected, and Venture Capital was not an exception. In an attempt to keep the economy moving while the country was at a standstill, the Federal Reserve pushed more money into the U.S. economy than ever before. Families received stimulus checks, student loans were put on hold, and even the Venture Capital world got a boost.

This led to a record-breaking raise in the VC world. Thanks to the increased amount of corporate bonds purchased by the Fed, many investors were left with an influx of cash. This was re-invested in a variety of ways, one avenue being through VCs.

With the boost of investment money, the obvious assumption might be that VC’s would be investing in more businesses. This is partially true. The number of businesses they invested in rose but not proportionally to the amount of money they raised. According to the Q4 2021 PitchBook-NVCA Venture Monitor, the total number of deals grew to 17,054 in 2021. Up 40% from 12,173 the previous year. For context the total amount of funding almost doubled during this period (330 billion raised in 2021 compared to 166.6 billion in 2020).

This enormous gap in capital and deals can be explained by hockey stick growth in startup valuations. However, as we see the light at the end of the covid tunnel, many are left wondering what is in store for valuations in 2022? While nobody can say for certain, we are already seeing startup valuations trend down. The money that helped VCs achieve their record-breaking capital will still be in their circulation but the rate new capital is being raised will slow dramatically due to the Fed taking a step back.

Valuation data is showing consumer tech and enterprise tech taking the biggest hits, while Fintech, Biotech and Pharma remain steady. Although we shouldn’t expect to see a complete drop off from the 2021 high, valuations will gradually start to dip. However, they are still expected to remain higher than pre-pandemic.

Regardless of which way the market is trending, the importance of an accurate valuation remains constant. With a valuation too high you risk getting turned away from investors before you even set foot in the door. On the contrary, with a valuation too low you risk losing money you didn’t know you had. To help improve your valuation or ability to raise funding, there are a few things to keep in mind.

  • Well Thought Out and Defined Use of Capital
  • IP or Protections
  • Barriers to Entry
  • Experienced Team
  • Clear Objectives and Plan
  • Thoughts Around a Future Exit
  • Aggressive but Attainable Projections

When presenting to any source of potential investment money, whether it be VC or not, it is extremely important to clearly define your use of capital. It needs to be visible that there is both a need and an effective use for the funds. The best way to demonstrate this is through your budget. Show your revenue, costs, variables, and any extra expenses that you foresee as your company grows.

Going hand in hand with your use of capital is your clear objective and plan. Not only do you need to show where you’re putting the money, you need to show how you’re going to make it work. Do you already have set goals and milestones you want to achieve? How will you stay on track and ensure you meet those quotas?

Consistently measuring how you stay on top of these things will be critical to your success. Part of this approach will also need to include any barriers to enter the market and any potential exit strategies you might foresee. All of these reenforce the idea that you need to be the most educated person on your industry, this will help to back your valuation.

Another important thing to keep in mind is your team. Each individual’s knowledge, expertise and experience will play a vital role in the company, especially in its early stages. It is important to make sure the gaps are being filled. The experience of your team will play a key role in its valuation. If you can prove their value to the company, you may be able to justify a higher valuation.

Lastly, be sure to include your projections. These need to be aggressive but attainable. Show your potential investor you’re a go-getter with confidence in your business but don’t make promises you can’t keep. Higher projections can lead to a high valuation but that’s only true if you can meet those expectations. Falling short of your high projections will not leave others with much faith in you or your business.

With these few tips in mind, it is easy to stay optimistic for valuations in the future. As we enter Q3 of 2022 nobody can say for certain what valuation trends will emerge. Whether valuations are on the verge of a dip or at their all-time high, it’s vital to remember the best type of valuation you can have is an accurate one. If you still have questions about valuating your company, reach out to our team. Our experienced team of entrepreneurs is ready and willing to answer any questions you have.

A Quick Recap on the 2021 Merger & Acquisition Market

By Cory Kaisersatt

As many may know, the merger and acquisition market was K.O.’d in 2020 due to the COVID-19 outbreak and the economic uncertainty of the year that followed. In 2021, however, M&A made a Robert Downey Jr. circa mid 2000’s level comeback. Last year’s M&A activity hit record setting numbers in the Q4 home stretch of October, November, and December – eventually eclipsing 2020’s volume by over $2B. This can largely be attributed to two leading factors: the subsiding of the pandemic and simultaneous success of public markets.

Stability and growth returned to the markets as companies and the general public better understood how to coexist with the pandemic. This increased certainty provided companies the confidence to resume growth acquisition strategy regionally and internationally as borders began to reopen over the summer months. The success of public companies only enhanced these effects. With revenue postings healthy across the board in 2021 and public companies comprising the majority of M&A deals, companies were given the confidence and the means to “pull the trigger” on growth-driven M&A strategies.

The activity was equally as fruitful for Private Equity. An increasing amount of capital is being allocated to funds that are more specialized in their approach and address a niche, allowing for general PE coverage of a broader range of industries. The longevity of PE is also becoming more promising as funds are diversifying their portfolios into a variety of deals including leveraged buyout, growth or continuation, and pure venture.

The leading sector for M&A activity remains Tech with ESG at a distant second. Due to the supply chain and labor complications, companies are being forced to adopt new technologies faster to streamline processes, connect with customers and improve productivity. ESG topics around workforce, sustainability and underrepresented people groups are being increasinbly prioritized by the public and, subsequently, corporations. There is also speculation that the SEC will require reporting on ESG matters in coming years.

The biggest concern in the M&A market reared its head late in the year as inflation rates in the U.S. skyrocketed to 7%. Inflation at this level hasn’t occurred since the early 80’s and has many economists and market participants uncertain on economic outlooks. In an attempt to combat the inflation problem, the Fed recently announced the first of what are expected to be several rate hikes in FY 2022. This is expected to lead to increased saving rates, discount rates and borrowing costs – all of which are typically indicators of a deceleration in M&A activity.

That is a wrap for 2021 M&A. We are excited to see what is in store in the space for 2022.

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