How to Fundraise During a Recession
Uber. AirBnB. Venmo. There are many companies with household names that started during the Great Recession. They attracted landmark sums of venture capital by innovating and showing investors that their ideas would make money.
As the bears overrun the U.S. stock market, it’s a useful reminder to look at the past. Fundraising is still possible because growth is still possible for startups during a recession; that kind of potential gets the attention of investors who don’t want to watch their money wither in the markets.
Billionaire Mark Cuban gets it. The world-famous investor told Yahoo in 2020 that a pandemic-fueled recession would lead to the birth of world-class companies. Cuban said lean times make investors hungry to invest in culture-changing technologies.
“There’s an appetite for investing in those things right now,” he said. “You know, we don’t dominate in AI like we need to. This is a chance for us to create infrastructure 2.0.”
Investors don’t stop wanting to make money during a recession. For many, investing in young businesses is the most logical path to making money. If the stock market can’t offer big gains, maybe a well-funded tech company can offer a big payday.
Despite uncertainty for the rest of the year, private markets are still alive and well. Crunchbase noted that the first quarter of 2022 produced $82.8 billion for early-stage U.S. companies. That was an 11% drop from the quarter before, but still the fourth-largest sum in history.
Investors are ready for this. They’ve squirreled away cash to invest during a downturn. But there are things you need to do to attract investment. While Y Combinator wrote in an email to founders that simply staying alive during an economic downturn can be a win for companies, we can offer better advice than that.
Angel & seed deals remain consistent
During market downturns, data shows the number of deals made by angels and seed investors either remained constant or rose.
There are 480 startup hubs around the world. Deals are getting done, though the amount of cash involved could be lower. Angels and seed investors are willing to take risks. They consider themselves prescient. They can see when an idea is going to take off. If a young company can sell an investor on their growth plan or ability to make money, they could soon see a cash infusion.
Why are startups appealing? They can still grow
The thing companies like Venmo, Uber, and AirBnB did was solve a problem. Uber flipped the taxi and cab business on its head. AirBnB basically started a new industry. Venmo gave people an easy way to send money back and forth with their phone. Simply put, good ideas will take off whether it’s in a recession or a boom time.
When stocks and bonds aren’t safe bets – both are way off in 2022 – investors are going to look for other ways to make money.
“There’s still a lot of dry powder in the market,” UVC Partners managing partner Ingo Potthof told PitchBook. “Even if companies are overvalued, they have revenue and cash to survive compared to 2001 where investment demand dropped by 50%. If that happened, we’ll still be at the same level as 2018. We’ll see what happens over the next year, but we shouldn’t just look back at 2021.”
Hold on and tighten Up
The average recession lasts 15 months. It’s not the most inspiring bit of advice, but Y Combinator was onto something. Companies that survive in lean times will have compelling proof to show investors.
Getting to that point is the trick. Companies may need to cut expenses to survive. If you’re seeking funding during a pullback, you’ll want to increase liquidity and show more profitability or increasing market share.
Find a selling point
Ideas are great, in theory. Investors don’t want to hear about theories. They want to see data that shows them they are going to make money investing in your idea.
Find an area where your business excels. Whether it’s increasing market share, an upward trend in revenue or strong cash flow, you’ll need to point to something that makes your business uniquely positioned to make an investor money.
And don’t forget that your goal should be growth. Now is the time to make sure your sales processes are smooth, targeted and efficient. Growth can be found if you know where to look.
Adapting sales to a recession
How do you give your sales a bump when there’s an economic downturn? As with anything, you need to change with the times.
Streamline your sales process to make deals happen faster. Get more accurate data. Change course to follow the money.
We recently hosted a session on how your business can navigate the changing sales world and make your sales team more efficient and effective. Watch the replay here.
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