The decade following the global financial crisis has been a prosperous time in the US. A positive economic outlook brings with it an easily accessible flow of investor money. Many entrepreneurs used this opportune time to launch or grow their business.
But with the immediate outlook not looking quite as rosy, there are questions about the availability of investment funds.
- Should founders give up on trying to fund their big idea?
- Is capital raising a pointless exercise during a recession?
Yes, there seems to be a downturn in investment activity. Take this study, from Startup Genome, showing a continuing downward trend in series A+ deals in the United States.
As an entrepreneur, you can't expect to only operate in boom times. While raising capital during or after a financial crisis is harder, it's not impossible.
Whether you're looking for seed money to launch your venture, or you're just trying to keep the lights on, here's how to approach fundraising in the aftermath of COVID-19.
A positive mindset is the most valuable asset you can possess during a downturn. Remaining a "glass-half-full" person is vital to spotting the opportunities in a crisis.
And you have every reason to remain positive; past recessions birthed companies that have now become household names.
Brothers Walt and Roy Disney introduced us to Mickey Mouse during the 1929 depression – the worst depression in history. Fed-ex launched its express door-to-door delivery service at the tail end of the 1970 recession. And more recently, Airbnb, Uber and WhatsApp – novel ideas that have shaped modern culture and living – were started during the global financial crisis of 2008.
There undoubtedly have been entrepreneurs toiling away on projects during lockdown, and world-changing businesses will emerge from this period. Now is not the time to give up, but to double down on your efforts.
Don't give away equity easily
Billionaire entrepreneur and investor, Mark Cuban, agrees that world-class companies will be born "specifically because the pandemic of 2020 happened".
The 61-year-old Shark Tank investor remains optimistic for those starting or growing a business during this period of uncertainty. On a recent podcast, he shared his views on why "despite the horror of it all, this is the best time ever to start a business."
However, Cuban is of the opinion that raising capital should be a last resort. Entrepreneurs should utilize every resource they have, put in sweat equity and tap into their own network before reaching out for venture capital.
In an interview with Chase Jarvis in 2016, Cuban outlines how he would approach funding your growth:
- Sweat equity – do whatever you can on your own
- Customer equity – get customers buying your product or service to fund your growth
- Kickstarter or Indigo – crowdsource the capital
- Venture capital – the last resort
Cuban's raise-capital-as-a-last-resort philosophy urges business owners to explore all alternatives before handing away ownership of their company.
He warns that "they (investors) aren't giving it to you for charity, and the minute you take that money, that's not the end, but when the obligation really starts. You thought you had an obligation to grow your business before you took the money? You have no idea."
Cut expenses to strengthen your cash position
Fundraising during a downturn can be slower. Investors might be holding out until they see the green shoots of recovery before parting with their cash.
To allow you to play the waiting game, you might need to cut frivolous spending.
Assess your overheads with a full-fledged financial audit. And if need be, get ruthless with cost-cutting. Anything that isn't strictly essential to provide your main offering must go. That means taking the focus off growth and discontinuing new ventures and side projects, axing underperforming departments and putting the brakes on marketing.
Although it hurts, you should sacrifice long-term growth for immediate returns.
Staff and resources that you free up should be reallocated to only those operations which make up the core of your business.
If you can't get the money today, do everything possible to survive until tomorrow.
Hopefully, you're entering this downturn already in the black. But if not, getting to profitability should be your top priority.
Stopping all non-essential expenses will help to add to your bottom line, but you should also review the operational costs of delivering your product or service.
How can you make your product or service more efficient? Can you improve systems or distribution, or can you use automation?
Now is the perfect time to look at how you can streamline your business and reach profitability as quickly as possible.
Don't only sell a dream, sell data
While a compelling vision and a solid business plan can catch the attention of an investor, nothing seals the deal more than solid accounting – especially now, with investors much more cautious and likely to scrutinize your numbers in more detail.
If you can show increasing market share, strong cash flow and an upward trend in revenue as we come out of lockdown, then you have all the growth characteristics that investors are looking for.
And even if your revenue and profit aren't soaring (yet), being able to demonstrate that you've got a handle on your burn rate and you built as large a runway as possible, it will provide that all-important confidence investors need to back your venture.
If you can prove a track record of success through data and you have a clear plan for continued growth and profitability, your business is going to be an obvious choice for investors.
Give investors an opportunity
While it's reasonable to assume that capital will be harder to raise during a downturn, it's not always the case. The reality is that there are billions of investment funds waiting to be allocated.
Many investors are countercyclical, and they know that the best investments are made during a recession. The cash they hold in the bank is likely to be earning an insignificant return and what they're waiting for is an opportunity.
By doing what you can to cut expenses, increase liquidity and show more profitability, you're presenting investors with that opportunity.
If you're ready to put your best foot forward with potential investors, get in touch to see how working with Full Stack can help.