You will often hear people in finance talk about the death spiral. Generally speaking, this typically would involve a loan from investors to a company, and the investors would receive a type of convertible debt in return for making the loan. This type of debt would give the loaning investors the option of exchanging that debt (converting it) to stock shares for far less than the existing share price. The company would get a cash infusion, but end up giving away a lot of value and power to receive it.
The idea of a death spiral has progressively expanded, but it simply entails a path toward inevitable destruction if not addressed in a timely manner. It would be safe to say that most finance experts would caution against a death spiral, and here are some thoughts on that wise advice if you are still debating going for it anyway.
Don’t Let Easy Money Seduce You
Many companies have been strapped for cash at some point during their existence, especially early on, and they have been forced to borrow funds on less than optimal terms. The whole death spiral problem essentially started with the need for immediate cash and subsequent willingness to receive it all all costs. However, these days it does not seem necessary, nor wise, for young companies to take on this value plunging ploy. If it is easy to obtain the money, then there is most likely a catch. Venture Capital funding is active right now and with that, there just doesn’t seem to be a scenario where it is necessary to take that path.
Don’t Drown in Debt
There is a lot to be said for a company that can manage to bootstrap its business. This will force the leadership team to attentively consider all expenses and decisions, and it really has the ability to set up a company for financial success in the future. Many of those out there that were able to bootstrap will attest to its many advantages. Although it may seem that a cash infusion is an absolute necessity, taking on debt is a serious responsibility that can have lingering effects. Taking on debt really should be considered more of a last resort rather than an initial funding measure.
Over-Acquiring
The path to cash in some cases may seem faster by acquiring similar but smaller endeavors. These acquisitions may possibly increase production capabilities and capital access, along with bringing other benefits since it’s basically an instant expansion. However, companies become so fascinated with acquiring that they end up needing to finance the process, and eventually become entangled in complicated unfavorable financing anyway. This longer and slower spiral may be an indirect approach, but the outcome will yet be the same.
Merging Beyond Recognition
Companies may explore merging with a firm, ideally on somewhat balanced ground, rather than merely acquiring another business. This will obviously bring a multitude of financial benefits, but it can in some cases happen at the expense of the business’s very purpose. Some see this as a type of hidden death spiral because one of the merging companies may be twisted into something unrecognizable, which seems an awful lot like the very result that was meant to be avoided.
Starting a business is exciting and dare we say fun, but funding operations is a completely different animal. Figuring out which money to take and on what terms is a major decision that cannot be taken lightly, regardless of a company’s financial potential.
Are you looking for a cash infusion that is right for your business? Contact us at MCDA CCG, Inc. and learn how we can assist you in avoiding a death spiral. Our comprehensive approach will provide you with all of the knowledge to make the best educated decision for you and your business.