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Raising capital for startups requires a big swing from new founders. Raising capital during a downturn requires an even heftier swing with additional financial planning looped in. Creative enterprise ventures come with opportunities to learn and grow as a business owner, but with a looming recession, young entrepreneurs funneling their time and money into a startup could face a tough road ahead.
Most new startup founders have never faced a recession, at least from the business end. Consumers experience a different effect of a downturned market. Looking at a recession through a founder’s lens paints an entirely different picture.
Does the economic downshift mean founders should place their business dreams on the shelf for later? Not at all. Many startups succeed during a recession. For example, Credit Karma — now the largest free credit-checking service — launched in the middle of the 2008 recession.
If you’re going forward with startup fundraising, you’ll need accurate and organized financial records for investors.
Startup fundraising in a recession
Founders can learn from business owners that have dealt with past recessions. By adjusting your expectations and shifting your business model to fit the market, you can still raise venture capital during a downturn.
However, building out during a recession shouldn’t always be a focal point depending on your current runway and cash flow. Instead, concentrate on bringing your original vision to life. Deliver a superb product or service to your target market to attract loyal customers. Leave expansion on the backburner. You can always have a second round of fundraising when the public markets settle.
COVID-19’s impact on startups
When COVID-19 hit, nobody knew how long the virus would remain. Businesses took a brutal hit once government-mandated shutdowns began spreading across the globe. Companies were closed for an extended period without enough notice to prepare financially, leading many to shut their doors permanently when they could not recoup their losses. April 2020 also saw a massive spike in unemployment in the United States, rivaling numbers from the Great Depression.
Just over 50% of Americans believe that the effects of the COVID-19 recession exceeded the 2008 economic crash. With another recession on the horizon, many founders are hesitant about searching for startup funding. However, just like the 2008 crash, the COVID-19 recession spiked the average number of startups up by 24.3% over 2019.
Venture capital firms may not offer the over-inflated amounts they did during a bull market, but the seasoned investors know a good investment will be fruitful both in and out of a recession.
How to raise capital during a market downturn
Prepping for fundraising looks different in a recession. As a founder, you should be comfortable with a flexible budget and business model. Investors can offer financial insight for navigating a downturn market as you work through an adjusted business model.
1. Investor readiness
Readying your pitch for investors is a multistep process. Organize all necessary financial documentation after checking it for accuracy. Instead of offering a business model focused on expansion, consider presenting an alternative emphasizing retaining and raising revenue in the coming months.
P&L statements and budgeting plans are valuable documents to bring to investors. Show them you and your team understand the hurdles of unfavorable market conditions and have steps to deal with them accordingly.
2. Restructure your budget
Iron-clad budgets are a necessity during growth stages and periods of stagnating revenue. When restructuring a budget, founders will benefit from looking ahead financially. Cash flow forecast sheets are a helpful tool that aids in designing a new budget.
Cut operational costs where you can without a negative impact on production or look at decreasing fixed costs. For example, instead of renting an office, have your team work from home temporarily. Hold off on expanding departments or cut back on vendor costs if possible. These changes seem small on paper, but they significantly affect your monthly expenses.
3. Push what’s doing well
There’s no need to reinvent the wheel if your startup has a successful product or service. Investors want to see positive results and know where their money is going. During a recession, consumer spending might take a hit, but if your loyal clients continue to pay for a specific service or product, keep your focus in that direction. If you plan on using funds for marketing, show investors you’re putting it towards what’s already working.
4. Reduce burn rate
Burn rate should always be on your radar. When your company runs through cash too fast, this can lead to bankruptcy. Investors want to see a future in your company.
Cutting costs in non-essential areas (non-essential as your business can function without them) is one way to reduce burn rate immediately for the next month. Burn rate should be flexible in the same way budgets are. Restructuring can take a few tries to get just right. Decreasing burn rate and adjusting your budget go hand in hand.
Keep playing with numbers based on your revenue and cash flow forecast sheet to keep ahead of any financial dips. That way you’re able to give investors a solid number to keep your business operating smoothly.
5. Extend your runway
Runway is the amount of time your startup has before running out of money. If your runway is coming up short, consider raising capital to prevent cash flow problems. Taking out a business loan is an option, but another monthly payment isn’t ideal when trying to balance the scales during a recession. Talk honestly with your investors to devise a strategy before cash flow becomes a problem.
6. Be proactive
Are you seeing a dip in your revenue before the month’s end? Have your operational costs gone up? Tackle these issues the moment they appear. Market experts can give educated opinions, but no one knows how their business will be affected during a recession.
Speak to your investors as early as possible with prepped financial statements to back your concerns. Real numbers demonstrate where your business is going with complete transparency. Keep a close eye on your cash flow and burn rate to avoid any unwelcome surprises.
7. Limit new projects
Debuting new projects is an exciting moment for founders. New usually means upped income or interest from new clients who have been on the fence. During a recession, though, we know consumers can tighten their wallets when it comes to extra spending. Consistent revenue is earned by what is already out on the market; focus your efforts on keeping those clients happy.
Put new projects on the ‘future’ shelf. These innovative ideas aren’t dead in the water; just put them on hold until the time is right. When the time comes, you can show investors plans to entice them for second or third-round funding.
Organizing financial documents
Investors look at the numbers. They can love your idea and you, but if your documents are unorganized and precise, they could reconsider.
At Zeni, we keep all your financial records in one easy-to-navigate dashboard so that you can also streamline communication with investors:
- Get a clear picture of your cash balance, burn rate, and revenue sources — all updated daily.
- Leverage Zeni’s “Investor View” to give your investors a high-level, curated view of specific financial data that they can access anytime on their own.
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