The current economic crisis has caused many of the startups to have problems with the capital uprisinghe. This is known by emerging companies and also by large funds or accelerators that have made them aware of the need to extend their runaways (the amount of time a business has before running out of cash), to prepare for your tough times. Even and despite the circumstances you can learn from the past to make predictions.
Although investors in venture capital (VC) may be willing to put their capital in some companies, it is true that they have been more selective than in other times, for that reason startups should be much more prepared to pitch; so prepare a solid plan on how you will use the financing and how you will generate money, make sure you have a solid team.
The capital raising rounds
The startup industry has shown that economic crises affect venture capital investment, however, these investments do not stop, they only become more suspicious and history says that they are more likely to invest in early stage companies, which It opens up a lot of possibilities for founders. This does not mean that raising capital is easy for startups, but rather that risk awareness is growing and therefore their decisions are more cautious and the tickets are smaller.
AMEXCAP has made it known in its studies how crucial it is to be invested by a venture capital fund. 455 of 581 that have been funded by venture capital continue to operate, which represents a survival rate of 78%.
So get ready, present a solid project with a realistic amount of financing. I share the following key elements to increase your chance of being financed at this time:
1. Understand the big picture
As a startup, it’s crucial to understand the VC landscape during a downturn. Money is likely to be tight. So while some investors may still be willing to invest in startups, they will be much more selective than during boom times. Investors will look for the best opportunities to place their cash and protect it from inflation.
2. Be specific in the sector
In general, depending on the sector you are in, capital raising slows down during a recession and funds must be more selective with the investments they make. However, some sectors are more likely to experience a recession than others.
For example, in the case of this crisis caused by the pandemic, investors saw potential in startups from the fintech, proptech, logistics, or health industries.
As a startup, it’s crucial to understand how your industry will fare during a downturn. If you find yourself in a sector particularly vulnerable to a financial crisis, you may need to adjust your capital-raising strategy as a consequence.
3. Have a solid plan for how you will use the capital
A crucial part of raising capital during a recession is having a solid business plan. Potential investors will look for companies with a well-thought-out plan for using the financing they receive. They will also want to see evidence that your business is viable and has growth potential.
4. Be prepared to accept less money.
Raising capital during a recession can be more challenging than in good times. As a result, startups may have to accept less money from investors and may also have to give up a larger equity stake in their new company. It does not mean that you should accept any offer that comes your way, on the contrary, it is still important to negotiate with them and get the best possible deal. But you may need to be prepared to accept less money than you would in a strong economy.
If you are thinking of raising capital and you are not prepared to do so in a complex situation such as the one we are experiencing in crisis, contact an expert.
Adriana Ovando He has 12 years of experience in the entrepreneurial ecosystem collaborating in the public and private sectors for the industry. She has a degree in International Relations from the National Autonomous University of Mexico with a Master in Business & Technology at the Collective Academy; She currently works as Manager of Public Relations and Strategic Alliances for the consulting firm and venture capital fund G2. In addition, he is in charge of the Marketing area and develops the Content Marketing strategy for G2 Consultores, G2 Momentum Capital, Corporate Venture Capital, some fintech companies, with publications in MIT Forum Mexico, El Universal, Mundo Ejecutivo, The Hour, Europe World News, among others. Previously, Adriana she has collaborated with the Federal Economy Secretariat, the National Institute of the Entrepreneur, the Technological Innovation Fund and iLab center for entrepreneurship and innovation.