The ever-changing consumer patterns and high revenue losses make it extremely difficult for startups to raise capital, particularly during the current economic downturn.
As financial institutions raise interest rates to combat the recession, it is becoming increasingly difficult for startups to get the funds they require. So, what strategies should they use to increase the budget for much-needed innovations?
Table of contents:
- Innovation in times of crisis: a two-sided coin
- How can you raise money during a recession?
- Conclusion: how do you fund a startup in a downturn?
Innovation in times of crisis: a two-sided coin
Startups face unique challenges during an economic downturn. In the early stages, when the business is not yet profitable, they rely heavily on outside funding as they struggle to address core industry problems with novel technological innovations. Because of this unique dependability, they are extremely vulnerable when macroeconomic conditions change. And, as a result of recent recession-related capital constraints, investors are becoming more selective, forcing an increasing number of startups to seek dramatic means of survival.
Many of them (particularly in technology) had to lay off more than a third of their workforce, while the vast majority of healthcare, insurance, and finance-related startups are now fighting for credibility and dependability.
However, if you go back in time, you'll notice that the previous recessions gave birth to many of the most well-known start-ups we know today. Recessions, in fact, are excellent times to start a business because shifting markets provide opportunities for young, agile businesses. Consider Groupon, Uber, Microsoft, Netflix, General Electric, and even MTV, all of which were founded during recessions and have survived for decades.
This only goes to show that, while each downturn is different, there are some critical steps that startups should take when the economic environment worsens.
How can you raise money during a recession?
Typically, the early stages of running a startup generate more costs than profits because they invest heavily in expansion and product development. This is only possible with the assistance of business angels and venture capital, which provide a steady flow of funds to propel the innovation forward.
During a recession, a startup's dedicated capital shrinks, increasing competition and decreasing the likelihood of survival after the initial product failure. So, what strategies should startup CEOs employ to prepare for and survive a downturn?
Examine your financial situation
Before approaching an investor or applying for a loan, you should know how much money you will need to meet your business objectives. If you believe a small sum will be useful, you can apply for a business loan or grant. Remember that even small amounts of funding can help you establish your startup.
Operating cash flow is the best way to fund a startup during a downturn. Profits in business are not dependent on capital markets, and existing shareholders are not diluted. Reduce operational costs as much as possible without affecting production, or think about lowering fixed costs. To drive new sales, focus on business fundamentals such as increasing margins, improving operational efficiency, developing your team's strengths, and narrowing in on your market. Retrenchment refers to reducing costs and spending in response to financial and economic challenges.
Consider reducing R&D to focus on expanding your core product or service. Reduce the number of new initiatives, prioritizing only those with a high likelihood of immediate success. These short-term strategies increase cash while also strengthening the long-term position.
Embrace your best customers
A recession is an excellent time to strengthen your relationships with your most important customers. During a downturn, the best use of your time is to talk to customers and make sales. Remember that selling more to existing customers is easier and less expensive than acquiring new customers. If you run a B2B company, visiting customers gives you a clear picture of how satisfied your customers are and whether you risk losing them. If you own a B2C company, invest in reward programs and other initiatives to make your best customers feel appreciated.
Create a viable product
Investors will not fund your new product unless you have a working prototype, also known as a minimum viable product or MVP. Starting a new business can cause failure. It is not, however, the end of the world! An MVP can help you reduce the risk of product failure while increasing your chances of success. All you need to do is build a strong MVP that shows investors how your product can solve real-world problems.
Prioritize employee retention
Large competitors will pay top dollar for talented employees when the economy is bad. This is because training new employees is more expensive than retaining current employees. Maintaining and managing momentum is critical for retaining top talent and recruiting new talent. To keep your employees in good and bad times, focus on creating a strong workplace culture with a sense of security.
You can also gain flexibility and efficiency by outsourcing talent. You will not be required to bear the overhead costs associated with hiring an employee. Outsourcing has the potential to provide you with benefits such as lower costs, less stress for current employees, improved economic efficiency, and increased productivity.
Conclusion: how do you fund a startup in a downturn?
Recessions are a natural part of business cycles, and businesses of all sizes must prepare for economic volatility and have a contingency plan to weather any storm. Startups will always be among the first businesses to be impacted by the recession because they are frequently at the forefront of economic trends. This is inherent in their core definition, as they take risks to innovate and grow in ways that other businesses cannot or will not.
During the downturn, fundraising preparation looks different. A flexible budget and business model should put you at ease as a founder. As you work through an adjusted business model, investors can provide financial insight for navigating a downturn market. Remember that opportunities appear and vanish quickly during a downturn, so the most adaptable and resourceful entrepreneurs will emerge victorious.
If you want to survive and thrive, you must take care of your existing investors who have already invested in your company. It's a good idea to keep your investors in mind regardless of the economy. If you don't already have a list of investors ready to pitch, you should start building relationships with them now so you can reach out when the time comes. Don't forget to ask your customers about their experiences with your product and whether it solved their problems.
And, when it comes to cutting costs, especially human-related costs, it is always best to consult with an experienced IT Consultant before you cause irreversible harm.