There are more than 100 million startups that launch every year across the globe. More specific to the UK, Fintech is one of the fastest growing sectors driving change and financial inclusion, but there’s one challenge all startups face, and that’s funding.
If raising capital wasn’t hard enough for early stage companies, let’s throw in a global pandemic to make things a little more interesting.
With that said, it’s time to ready the popcorn.
There have been some incredibly successful companies that were started during a recession, like Disney, IBM and other international names. I guess there’s no better way to recession proof your company, then by starting it during a recession.
Although not quite a once in a lifetime event, launching a business during a pandemic is a rare and highly beneficial time to hone your entrepreneurial skills.
All startups face challenges and with funding, or lack thereof, being one of the challenges impacting your survival, as a founder, you need to be able to stretch your runway longer than it was even intended to stretch.This includes being able to pivot to lower operating costs overnight, re-negotiate payment terms, and largely ‘sell your vision’ ie. get your stakeholders, partners, and team to believe that your business will continue to be around long after the pandemic is over.
Being able to convey confidence and back this up with conviction, will be two skills that you’ll develop rapidly during a time like we’re facing now, that will demonstrate first hand your abilities as a leader – there's a reason early stage investors / angels predominately invest in the founder and the team they build, because all investors know that nothing ever goes exactly to plan. Covid is a perfect example of one of the many unexpected / unanticipated events, that impact a startups journey.
Raising capital during covid will be more challenging. A number of businesses are impacted, and that includes the portfolio companies of VC’s - while its never much fun being on the outside, VC’s are, and should be, backing their current portfolio companies and reserving much needed capital for bailouts. This limits the capital available for new investments.
Likewise, angel investors typically grow their wealth in at least one of three ways:
Salaried income – with mass redundancies job security becomes questionable at a time like this, and so does the amount of an angels net assets they’re able / willing to invest,
Investment income – combine capital market volatility and dividend deferrals, (and for the property investors) while landlords may be eligible for a deferral on their mortgage, it’s likely they’ll be giving rent relief to their tenants. Either combination of investment income may be impacted by a temporary reduction / removal of income. It’s the sky drivers and bungee jumpers of the investment world that are likely to consider more uncertainty in their portfolio by making an investment into a startup during this time,
Exit income – if an angel grew their wealth through exiting a company as a founder / early stage employee, they’ll know first hand how uncertain these current times are and will likely reserve capital - unless their expertise align strongly enough with a prospective startup to feel confident in the risk.
In light of the above, there's also downward pressure on valuations, meaning revenue metrics will be more relevant now and moving forward, so initial fundraising will be more difficult.
While the recent government incentives have been a great step in the right direction to showing support for a growing segment of the market, being startups that will be driving economies in the future, there is little support for pre-launch / early stage startups. This means the challenge of fundraising becomes much more relevant to new companies, and their survival depends on their ability to pivot and the speed at which they can facilitate a buisness altering shift. Either to another product that is not depend on customer facing scenarios or human capital intensive supply chains affected by covid lockdowns, and/or lower operating costs.
Another major challenge for startups is defining the right product / market fit. With covid lockdowns the cost of social media advertising is increasing with increased competition for paid ads, targeting similar market segments. Additionally, there's less ability to meet product testers and network.
As a result, this is a great time for startups that haven't launched because they have to think more creatively about how they market and develop their products. This also gives rise to an opportunity for startups to systemise their operations through technology from day one – a shift covid has forced on all businesses.
A startup that has the capacity to bring on talent, has a much larger pool to access due to the mass redundancies / reduced working hours we’re seeing across industries. There’s also the added benefit of reduced overheads while ‘work from home’ policies are in force. Another opportunity to streamline workflows and internal operations.
In short, it‘s these challenging times that make founders more experienced and better equipped for future economic downturns – a valuable opportunity in itself and one that gives founders the ability to gain more market share, if they know how to survive against the competition.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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