A Startup is a beautiful thing. It very often contains innovation, ideas, dreams and ambitions. But it also means heavy efforts, high risks, uncertainty and challenges, with the most important challenge (after having an idea and being able to turn it into a company) being finding the fundings to run it successfully and turn it into profitability in a relatively short amount of time.
An average of up to 78% of the startups who are born in the most important hubs around the world, either bankrupts within the first 3 years or simply never manages to grow into an established company. In order to land in the 22% of startups that actually succeed, new businesses, from the conception of a business plan to the building of a solid customer base, need capital funding to become profitable companies in the long-term.
When considering funding options, startups are forced to soon realize that capital can be found either via angels or venture capital (VC), which in each case requires to be approached and become engaged with the company’s vision and mission in order for them to decide to invest.
Regardless of which source of startup funding founders would find most appealing and choose to pursue, one thing is sure – the Covid-19 Pandemic has changed the course of looking for and securing finance for your startup. Expectations at the beginning of 2020 for venture capital were reasonably high. Between 2018 and early 2020, over 25,000 global startups were yearly funded through venture capital.
But then, unfortunately, came the pandemic which put the world on hold and changed its economic health, pushing economists and investors to brace themselves for the worst. In light of this crisis, the most common belief even among funders was that venture capital funding for startups across Europe and the US was set to take a significant hit.
But that is a limited and rather pessimistic view that is not entirely true. For instance Helsinki, the city where Startuplifers is based, throughout 2020 has been one of the hubs with the highest amount of money invested in startups per capita in the world. Thousands of companies were founded around the world and several managed to succeed significantly by the beginning of 2021 already.
While we now finally seem to see a relatively close ending to the health crisis, at least in most of the Western countries, it is undeniable that the economical situation of the vast majority of the ecosystems has changed drastically, and several aspects of it might simply never go back to what they were before.
As we said at the beginning, startups are a beautiful thing. People will never stop having ideas and challenging themselves, so it is only logical that startups keep being created.
There are several ways to work around the threat imposed on business founders and the changes that influenced companies all over the world. A combination of innovative technologies, well-done research and possible changes in business structures could help startups find funding during these unusual times.
Here are 5 ways to make life a bit easier when pursuing funding in the unique economical situation we currently live in.
1. Understand and accept that the process will take more time
Re-evaluate your expectations and align your startup capital needs with new expectations. Many VCs are taking their foot off the throttle because of the effects of Covid, and that is unfortunately something that you can not influence much. Startups across most industries have been making multiple trips to the banks in an effort to stay afloat – including many high valued unicorns.
It’s important for startup entrepreneurs to understand this steep decline in the investment market. They should expect a ‘new normal’ to include fewer rounds of funding, more syndicated deals, and definitely more cautious valuations.
By expecting delays, lower valuations, and fewer rounds of funding, startup entrepreneurs should be able to navigate the new normal strategically. They will be expected to prioritize growth strategies, consider more cost-effective marketing campaigns, and find ways to stay afloat until the deal comes in.
2. Learn from the past
The global pandemic isn’t the first hit to the international economy and will likely not be the last. We can learn from the past to find ways out of current crises. Despite world-class vaccination programs being developed globally, there’s still a long way to go. Thankfully, many VC firms are up for the challenge. Angel investors, VCs and banks know all too well that many startups will thrive in the wake of the pandemic, and they’ll want to be a part of it.
Let us remember the 2008 financial crash: a tragic era for many businesses, with thousands forced to shut down. There were, however, some big winners. How did they do it, and should startups today be following their path?
Companies then and now were advised by investors to plan for two years without raising any new funding. Startups have no choice but to throw out their previous business plans as well as reassess expenses and risks.
A Crunchbase study found that seed-rounds were the least affected of all early-stage rounds. In fact, seed capital grew in 2008, 2009 and 2010. The assumption is that at the time, seed was a new institutional funding class due to the innovation in cloud computing. It was, therefore, cheaper to start a company.
In this case, the 2008 crash – the largest since the Great Depression – took over two years for the funding market to pick up again. As advised over a decade ago, startups should plan for two years without additional capital by restructuring business models. This way, in the worst-case scenario of not finding funding, they have a plan in place until the market will pick up again.
3. Improve every detail of your remote contact and approach
Take a look at your messaging to investors. It can always be improved. It’s no secret that investors are more likely to financially support businesses with a strong communication in their approach. You will have to ensure that your pitch reflects the same. Whether your focus point is product innovation, a problem you are seeking to address, or answers you want to give to the world, your startup should first and foremost stand out from the crowd.
With that being said, you’ll probably find yourself upselling your company, as you should. However, when it comes to valuations, be always open to negotiations. As we continue to walk hopelessly into more economic uncertainty, kickstarting your deal with a very high valuation will put investors off. Be realistic and achievable to gain their trust and appreciation right away.
4. Turn to SaaS!
The tech, and in particular SaaS industry has historically been able to preserve itself and in some cases even bloom during economic crises. Therefore, VC’s and angel investors naturally turn to technology and R&D companies, with SaaS being the best fusion of those. In particular, big investors are setting up new funds to support high-potential startups with impactful solutions to problems caused by the coronavirus pandemic.
From the future of the workplace to online health care, these are the areas warranting the most investor attention. Regardless of the startup industry, service, or goods provided, it’s always advantageous to explore technological software solutions that could be implemented into the business going forward.
5. Consider lowering your valuation
Think very carefully about how much capital your startup actually needs. With all the uncertainty in the world right now, a bridging round (or a lower valuation) might be more suitable for your startup.
A “bridge round” is essentially a small round of funding to help get a startup through a certain period of time until its next (larger) funding round. This round of funding can be implemented at any startup stage and is a good way to access just about the right amount of capital easily.
So, simply rethink the amount you’re asking for before reaching out to an investor. And remember that working capital is more important than maintaining a valuation that can always go back up when the market returns to a healthier state in the long run.
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