Crisis Funding: How Early-Stage Startups Can Secure Capital During Economic Downturns

Early-stage startups can secure capital during economic downturns but it can also be challenging. Particularly, when founders are reliant on investor backing to keep their small businesses running. You’re also concerned about customers accepting orders, collecting payments, and paying the team.

If you were to study historical data, an average economic downturn typically occurs every eight years. At this time, the market experiences a 20% and higher drop in the stock market. The US economy has been running with a bull market for ten consecutive years.

The S&P 500 has touched a record high of over 300% in the last decade. In the previous recession that lasted from October 2007 to March 2009, the S&P 500 lost close to 50% of its value. This “Great Recession” lasted for 17 months, with the economy showing negative GDP growth.

The COVID-19 pandemic was another unexpected downturn that left economies worldwide reeling under the impact. Experts expect another recession to come up soon. This means that startups at all stages of their growth cycle should start prepping for fundraising challenges.

How Early-Stage Startups Can Secure Capital During Economic Downturns

Judging by historical statistics, you should be prepared for the possibility of a recession and how to navigate the challenges. However, later-stage startups are likely to be hit harder than early-stage companies.

Startups that anticipate making an exit within the next five to seven years are also at risk.

When it comes to valuations, data suggests that metrics remain steady during the initial two years of the recession. The numbers started to drop by 27% two years into the downturn. That’s because, at the start of the recession, investors have sufficient funds to continue deploying capital.

They may disregard macroeconomic conditions until the recession continues for longer, and they must balance their portfolios. Delays in responses also occur because of the lags in GDP advance numbers. These reports are released around a quarter later.

As a result, founders, investors, and other key players may not be aware of the recession up to three quarters after its onset. While venture capitalists may not roll back their investments, they do have more stringent criteria for screening startups.

Investor Criteria for Screening Early-Stage Startups

Considering that the year 2023 has already been shaky for the startup landscape, not all companies have felt the impact.

Several factors come into play, including individual business models, existing customer base, and product niche. For instance, fast-moving consumer goods may or FMGs maintain sales despite downturns.

Other factors that influence startup stability include the runway it has in the form of funds in the bank. The business idea, mission statement, and overhead costs can also affect viability. Some companies can smoothly roll back costs while maintaining product quality and supply.

Companies that can demonstrate resilience and strength are the startups that investors are likely to back during the recession. Most VCs will continue to support businesses they have invested in previously. However, others may pull back and look for other options.

Putting a hold on fresh investments until the downturn reverses is also a strategy VCs may adopt. Their focus will be on robust business plans with a clear direction of how founders intend to use the funding.

Revenue generation strategies and experienced management teams are also high on their list of priorities. VCs may particularly look for executives with prior experience navigating similar recessions successfully.

The top priority is always the founder and their proven business acumen. Their track record with companies they have successfully founded and exited in the past is also a criterion.

Funding for Pre-Seed, Seed, and Early-Stage Startups

Early-stage startups can secure capital during economic downturns more easily than their more established counterparts. This rule also holds true for pre-seed and seed-stage startups.

Barring a few capital-intensive verticals, such as life sciences, medical drug development, or agritech, most ventures need less funding.

As a result, investors may be more open to offering them money as against companies looking for later-stage funding rounds. The pandemic crisis is a crucial example. Venture capitalists did not stop investing in companies totally.

Although the market conditions were changing, there was money available in the market. Further, while investors may be open to funding upcoming ventures, they also have higher risk aversion. They may have more stringent screening processes and vet each candidate more carefully.

To keep the business afloat during the downturn, founders can adopt several strategies like meticulous planning, efficient management, and cost-cutting.

These approaches will help them navigate problems like investors offering smaller amounts of capital. Inflation results in higher prices for goods and services and is another issue that can make it harder to maintain sales volumes.

As an early-stage startup, if you’re considering approaching investors now, be aware of the macroeconomic conditions.

Your pitch deck will take into account questions investors are likely to ask about how the business can survive. You’ll also be realistic about the capital you’re pitching for and how you intend to deploy it for maximizing value.

According to historical data, the pandemic hit fundraising hard across the board for Series A, Series B, and Series C rounds, which dropped by over 40%. Expect a similar situation in the coming years.

Raising Funding During Economic Downturns – Start by Understanding Investor Mindset

Before approaching investors or putting together your pitch deck, start by creating a list. Add VCs, PE firms, family offices, and angels you intend to target.

Next, research the verticals in which they invest and any other information about how they vet startups. Here are some of the other factors to note:

• Economic downturns are excellent ways to test a company’s resilience and tolerance to setbacks. This is why investors are more likely to back winners who can weather the recession. They look for smaller ticket investments and startups to invest in. At the same time, bigger and more established companies may have a higher chance of attracting funding. Specifically if the larger corporations are engaging in acquisitions to purchase smaller competitors that are struggling for funding.
• Investors typically provide funding to companies working in high-growth and high-margin sectors that are resistant to downturns. Businesses that can continue operating even with low cash infusions attract more capital. On the flip side, capital-intensive companies are lower on their list of priorities.
• Investors tend to lower their holding periods during recessions. While earlier, this period used to be three to four years, now it is compressed to 12 to 18 months. At the end of this interval, investors want to pull out and walk away with a profit. Their strategy is to invest during the downturn when valuations are low, and they can negotiate for favorable terms.
• Investors also tend to time their investments according to market cycles. They raise capital and grow their funds before the recession so they can make investments when startup valuations are low. If they are engaging in the buy-and-build strategy, they may wait for the markets to improve. That’s when they make a strategic exit and walk away with profits.

 

Pitch decks during economic downturns need credible information to create the right impact. Check out this video, where I have explained the interesting data and facts around pitch decks you need to infuse into your presentation.

 

Strategies for Effective Fundraising During Downturns

Startups can secure capital during economic downturns by demonstrating resilience in their pitch decks. Here’s what you need to do:

Prepare Your Startup for Turbulent Economic Conditions

Prepare your startup for a turbulent economy by budgeting carefully. Add up the operational expenses you absolutely cannot avoid and assume they will remain consistent. Also, assume that revenue will remain consistent, similar to the numbers over the last three quarters.

If the startup manages some amount of earnings to keep it running, that means it is default live. Or, it can remain operational despite the downturns, and you don’t absolutely need to raise funding.

The company will survive regardless, and you might want to hold off on expansion strategies until market conditions improve.

In addition, you should have enough money in the bank to keep the company running for the next 24 months. This should be your anticipated runway while the recession lasts. As a rule, companies hold adequate cash to continue working for the next 12 to 18 months when they start fundraising.

Founders work on the assumption that the fundraising process, starting with approaching investors to money in the bank, will take time to execute. The most crucial strategy to prep for the recession is to cut back on costs and go lean.

Refrain from hiring expensive talent or investing in R&D to develop new products. Eliminate all the non-essential cash burn operations and focus on hunkering down and surviving until conditions turn favorable again.

Design a Pitch Deck Customized for Present Market Conditions

When designing the pitch deck, you’ll include the essential information investors want to see. The typical elements in a compelling pitch always center around the business plan, mission statement, MVP, team, and customer base.

However, an economic downturn pitch needs to highlight the key factors that will keep the company afloat. Regardless of the amount you’re looking to raise, whether $100K or $100M, the key is to present resilience and scalability.

Every fundraising pitch needs to tell a story. Your pitch should deliver robust financials with an impressive runway, money in the bank, and lean operational strategies. You’ll talk about how you restructured the budget to prepare for the downturn. And the contingency plans you have in place.

Provide accredited statistics in the form of graphs, infographics, and pie charts with color coding. The information should be in the form of bite-sized sections that are easy to assimilate, retain, and recall. Icons are handy for highlighting important info.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor on Facebook, with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Explain the Expected Allocation of Funds

Talk about reallocating existing funds toward assuring consistent revenues and maintaining the customer base–instead of focusing on customer acquisition. Of course, as with any pitch deck, the most crucial slide is how you intend to use the funds.

Investors will want to see that the funds will be deployed toward not just sustaining the business, but also profitability. They want assurance that they can expect rich returns once economic conditions improve and the market picks up.

With this objective in mind, you’ll create an interim business plan for the duration of the downturn. This plan will outline the strategies you’ll deploy to ensure the company continues to grow despite stormy macroeconomic conditions.

The pitch deck should primarily talk about revenue generation approaches and why customers will continue purchases as before. Statistics derived from meticulous market research, customer reviews and feedback, and User Experience (UX) can make the right impact.

Expect to answer detailed questions during the Q&A session about the factors that ensure company stability. Shine a spotlight on the revenues the company is generating at present and is anticipated to generate in the coming months.

Be Open to Accepting Less Capital than Expected

Although early-stage startups can secure capital during economic downturns, founders should be prepared to raise less than expected. Investors are cautious about the projects they can safely back; if they offer lower capital, you should be prepared to accept it.

You should also continue scouting around for alternative funding sources. Don’t hesitate to inform potential investors about the other people already backing your company. That’s validation that your project is viable and can attract capital to incentivize investors.

You can also mention the personal funding you’re sinking into the business and the money raised from friends and family. That’s another indication that you’re confident about the startup’s survival despite turbulent times.

Before We Sign Off!

Recessions, economic downturns, and turbulent market conditions are normal business cycles that occur from time to time. Conditions like these test the resilience of companies; the strongest remain in business, and the weakest go out of business.

Most investors are, undoubtedly, wary of diverting money into the market. But, others are willing to take advantage of lower valuations to invest money. Their objective is to make great profits once conditions improve.

Be prepared for stringent screening processes and investor reticence. However, you can also expect that they have their criteria for selecting viable opportunities. Your startup could make the cut.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.