Bootstrap, Sell Or Recapitalize? A Tech Entrepreneurs’ Guide To Surviving A Capital Crunch In A Downturn

By Itay Sagie

In the ever-changing landscape of the tech industry, even the most promising startups can find themselves in a precarious financial situation. For many early-stage tech entrepreneurs who raised capital in the golden era of 2021, the winds have shifted, and the market is now down.

The revenue multipliers that once buoyed their ventures are now significantly lower, and investment criteria is more stringent. Those who did not reach profitability will struggle to secure additional external funding.

However, this doesn’t mean you should give up. As entrepreneurs, we always find a way out. If you’re willing to have some hard conversations with yourself and with your board, you might be able to navigate this challenging situation.

Let’s explore three potential paths for getting your company through a capital crunch in this market.

Bootstrap your company

The first option, while easier said than done, calls for bootstrapping until market conditions improve.

This approach necessitates some tough decisions, such as securing bridge financing from current investors that keep your dilution and incentives in mind, and implementing cost-cutting measures.

While challenging, this period can be an opportunity for the entrepreneur to focus on sales execution and strengthen the company’s unit economics.

By honing in on revenue generation and operational efficiency, the startup can weather the storm and emerge stronger when the market rebounds.

Consider a sale

The second option — which I personally believe can bring the most value to the entrepreneur and their investors — is considering a merger or acquisition deal.

The transaction outcome will naturally depend on the company’s financial health. Although it may seem like a tough decision to let go of one’s vision, it can be a pragmatic move to allow the company to continue growing and succeeding with a new home.

If the M&A deal is structured properly, the founder can even take a second bite of the apple and benefit from future success of the company.

Recapitalize and restructure

The third option is probably the toughest one to pull off: recapitalization. That means restructuring the ownership of the company to reflect the current market dynamics. It is highly likely that most existing investors will quash this idea, but new investors will find it appealing. I did witness such a request by a VC as a prerequisite for future due diligence.

But if done well — with open negotiation between existing stakeholders and new ones — this approach demonstrates the entrepreneur’s and the board’s willingness to adapt to changing circumstances and positions the company for future growth.

Regardless of the chosen strategy, communication with existing investors is paramount. Transparently discussing the challenges faced and the proposed solutions fosters trust and collaboration. Aligning interests among stakeholders is essential and strategic to navigate through these turbulent times.

Itay Sagie, a guest contributor to Crunchbase News, is a seasoned lecturer and strategic adviser to startups and investors, specializing in strategy, growth and M&A. You can connect with him on LinkedIn for further insights and discussions.

Illustration: Dom Guzman