5th August, 2020
Finding the funds to start a new business during an economic downturn may seem daunting, but data has shown that there are unique opportunities waiting for those who are ready to take the plunge.
Becoming a startup founder and launching a new business can be difficult at the best of times and doing so during a pandemic and economic downturn can present a unique set of challenges.
Of all the challenges that new startup founders face, capital raising will always be a tough one. Pitching to investors, reviewing term sheets and deciding how much equity to give away at such an early stage can be really difficult, especially while you’re busy trying to simultaneously keep everything else in motion.
During a recession, raising capital can become even trickier. Economic uncertainty tends to turn investors into more cautious people, leading them to become apprehensive about how they distribute their funds, raising their barriers of entry higher than usual.
But, as most seasoned entrepreneurs will tell you, with challenge comes opportunity, and a higher barrier of entry can be looked at as a chance to apply more focus on standing out from the crowd.
So, if you’re looking to start a new business at the moment and are in the market for capital, here are some things to keep in mind that will help guide you through your fundraising efforts.
Some of the world’s most successful and long-standing companies were founded during challenging times.
IBM, which was founded in 1911, started selling business machines during the devasting Manchurian Plague, an epidemic which ravaged China for two years. Disney, founded in 1929, had barely been operational for a year before the Great Depression hit. Microsoft was launched in 1975, during a time when the economy was still recovering from a 16-month long recession.
History has shown us that economic crises and challenging times often create platforms for new ventures to succeed – and investors are aware of this.
In fact, when asked about whether there is an appetite amongst Australian VCs to invest in early stage businesses at the moment, Jackie Vullinghs, investment manager at AirTree Ventures, was everything but sceptical.
“There is absolutely an appetite,” Vullinghs told The Pulse, “we expect established venture funds will continue to operate largely as normal.
“Our business is to invest, and our outlook is long term.”
When it comes to raising capital during challenging times, early stage ventures actually have an advantage over more established ones.
In a recent report released by Techboard, data showed that the economic shock of the pandemic saw a drastic decline in larger capital raises, but, for the most part, smaller ones remained unaffected.
According to Vullinghs, the reason for this advantage is because early stage startup founders have a primary focus on building out the proof of concept and heavy product development, activities which should be “relatively unaffected by the market cycle”.
“Early stage startup founders who are raising pre-seed capital can expect to raise $100 – $300 thousand, and those at the seed stage can aim for anywhere up to $1.5 million,” she added.
Notwithstanding this advantage, all things considered, it’s no secret that investors are likely to be risk averse at the moment, making the contents of your investment pitch more important than ever before.
To be effective, preparing and ultimately presenting your business idea and model to your prospective investors needs to be done with strong undertones of reassurance and security.
Vullinghs believes that the pitch narrative needs to have an emphasis on explaining the identified market gap and how your new venture intends to securely bridge that gap, and a detailed overview as to why “you’re the right team” to bridge this gap.
“The more clearly you can express your answers to those questions, and reduce the risk on their investment, the more likely you are to succeed in raising capital.”
Due to the uncertainty of the time we currently live in, delaying your pre-seed or seed capital raise any longer than you absolutely have to can be a dangerous game to play, which is why Vullinghs encouraged hesitant founders to dive right into their new ventures without delay.
“It’s still unclear how the economic situation will develop, however if there is a sustained downturn the amount of capital available to invest may decline as superannuation funds and high net worth individuals reduce their exposure to illiquid and high-risk investments.
“Considering this uncertainty, we encourage those looking to raise capital to do so sooner rather than later.
In saying this, Vullinghs reminded these founders that the startup journey is a “marathon full of ups and downs”, which is notorious for causing founders to neglect their mental and physical health as they deal with the daily curve balls that are thrown in their direction.
To ensure that this doesn’t happen, Vullinghs implored founders entering the startup space to always put their health and personal relationships ahead of all else.
“Prioritise investing in your physical health and personal relationships to help you sustain a fast pace over the long term.”
Whether it be a pandemic, a financial crisis, a shift in industry trend or a personal challenge, there will always be something to stand in the way of launching a new venture.
Even in the strongest economies, these challenges can appear out of nowhere and can make it incredibly difficult to get things off the ground.
If you’re sitting on a good idea and have done enough research to know that it has real potential, don’t wait for the stars to perfectly align to get started.
Fortune favours the bold, and if you can navigate your way through these challenging times while striking the right balance between entrepreneurship, hustle, self-care and long-term thinking, your new business will flourish in any economic environment.
Are you motivated to start your own business but don’t know how to begin? MYOB has loads of free resources on business planning for beginners, so why not start here?