How to Raise Funds for Your Startup During the Current Economic Downturn?

Sudeep Srivastava February 8, 2023

Fundraising during recession becomes difficult for startups as they operate on a shoe-string budget. At the same time, the interest rates of financial institutions are rising to combat the recession. Besides the issues of lesser demand, the constantly changing consumption patterns along with high revenue losses is making it challenging for the startups to raise capital. This seems daunting for the founders looking to grow and build their startup and take it to the next level.

Yes, fundraising during an economic downturn is harder but not impossible to achieve. Looking at the history of recessions, we will notice that some of the great brands or companies such as Uber, WhatsApp, and Groupon were born as startups in the darkest period of recessions.

If you are looking for seeding money for your venture launch, then this blog is a must-read to know the right fundraising ideas.

However, before we jump on the tips that can actually help your startup in fundraising during inflation, let me quickly guide you through the basics of startup fundraising.

How does Startup Fundraising Work?

Startup fundraising is a common norm among companies to boost the growth potential of their business. Companies go for obtaining their startup capital in numerous ways. However, the funding for startup businesses mainly involves raising capital for business from investors through funding rounds.

How does investor startup fundraising work? Let’s understand through an example.

You are a startup founder. Your business has gained maturity, and you are looking forward to turning your product prototype into reality. But you will require early-stage fundraising to make it happen. Now you begin to look for investors.

The investors will only support you in building your startup if they believe in your idea. But they will also want to make a return on their investment. The idea here is when a company starts earning a profit, the investor wants equity in the company, which is an extra slice for taking the risk.

Companies that look for outside early stage funding with the seed round continue to go for series A, B, C, and D rounds. A company valuation takes place before any round begins. The valuation considers the startup’s product idea, prototype/MVP, management strategy, maturity, track record, market size, profit, and risk, all of which can impact the investor’s decision to invest in the company and how much given capital it will generate.

How to Raise Funds During a Recession?

In the previous blog on why a recession is a great time to launch a new software product, we have discussed how the top brands like Airbnb, Microsoft, and FedEx were born during the period of the global financial crisis.

One such example is IKEA, the world’s largest furniture retailer, which was founded in 1943, during the period of the Great Recession in the US. We Appinventors are extremely proud and glad to have worked with such a global goliath. Our experts helped IKEA in optimizing its business processes by building an ERP software product. This resulted in easy customer onboarding, thereby increasing their ROI.

Entrepreneurs should, therefore, try to find opportunities in the current crisis and double their efforts by taking inspiration from these great brands. Here are a few tips to follow in order to raise funds for business.

Build a Strong Product

Did you know that the investors can only judge you if you have a working sample of your product idea in the form of a Minimum Viable Product (MVP)?

With the help of an MVP, startups can eliminate the risk of product failure and double their chances of success. All you need to do is to build a strong MVP that will allow the investors to see the product’s functionality and how it can be utilized for solving real-world problems.

Overall, it becomes easier for the investors to see if your product is viable. Therefore, it is always recommended to build an MVP that would raise money for your product.

Cash Conservation

During a recession, it is always important for startup founders to have a constant check on their treasury. It is time to be conservative with spending. Tightening your grip on controlling your cash flow can help you survive and extend your business during a recession. Find out ways how and where you can cut costs. Devise alternate cost-effective schemes. Examine different avenues that can help you control your spending.

Calculate Your Funding Needs

Before you reach out to any investor or apply for a loan, you need to know how much money you will be required to achieve your business goals. Don’t just assume a particular amount; rather calculate by bringing in different aspects of your business in one place. If you think a small or one-time sum can help you, then you can go for a business loan or grant. Remember, starting with a not-so-large fundraising sum can also help you a lot in establishing your startup.

If you want a larger contribution, then you can go for connecting angel investors or venture capitalists. Understanding your funding requirements lets you take the best approach.

Study Your Financial Health

You cannot figure out what type of series funding you are eligible for if you do not know your financial health or where you stand today. Go for gathering business and personal tax returns, profit and loss statements, bank statements, and entire revenue projections that can help you to study and analyze the amount of funding you will require on hand to ensure your business growth.

Retain Employees

The recession is a great time for you to focus on employee retention. This is because onboarding and training new employees will cost you more than retaining your existing employees.

Therefore, startups must only focus on retaining their talent because, in this competitive market, top talents will get lucrative offers from competitors during the recession period. The greater you focus on keeping your employees satisfied and happy with the work culture and a sense of security, the better you will retain them in the long run.

Also, you can go for outsourcing talent as it will offer you flexibility and efficiency. You won’t be tied to bearing the overhead expense of hiring an employee. Outsourcing offers you the potential benefits like lower cost, less stress for the existing employees, improved economic efficiency, and better productivity.

Also Read- What Makes Outsourcing a Profitable Choice for Startups

Focus on Effective Sales Forecasting

Recessions are unpredictable and a normal ebb and flow of an economy. Ensure that you have a picture of what your business can expect if economic turbulence happens and what kind of plan would you have ready at that time to weather those conditions. Sit with your team and plan your own marketing and sales strategies that would help you in the long run.

Showcase and Sell Data

Nothing can seal the deal more than solid accounting, even if you have a great business plan and a compelling vision for catching the attention of the investors. Investors are now more cautious and critical about details. They would likely scrutinize your business numbers more. If you can project an increasing market share, greater returns, and a stronger cash flow, then you have got all the characteristics that an investor looks for.

Even if your profits aren’t soaring, you should demonstrate your business scaling ideas properly by getting the investors to agree that your business will have successful results in the long run. Proof of a track record of success with a clear dataset can make your business an obvious choice for investors.

Remain Optimistic

The recession period is undeniably stressful. But keeping a positive mindset can prove to be the most valuable asset during an economic downturn. Remaining positive and optimistic during such times can help you to come up with the best business decisions and strategies for fundraising.

Collaborate to Raise Money

Collaboration is a great way to raise venture capital for your startup during an economic downturn. For instance, you can join hands with those startup organizations that seek to offer the same solution as yours. Remember, there is more strength in numbers when it comes to fundraising during economic downturn. By collaborating with other startups, you can probably raise more along with receiving better attention, rather than doing it alone.

How to Thrive as a Startup During Recession?

The world has seen numerous recessions previously. On average, a recession hits every six years, as highlighted by the National Bureau of Economic Research. Recessions are common, and they exist long before people realize it. Therefore, it is crucial for startup owners to keep their best plans or actionable ideas ready to make their business recession-proof.

How to Thrive as a Startup During Recession?

Have a Clear Plan for Recession

Recessions are unpredictable and a normal ebb and flow of an economy. Ensure that you have a picture of what your business can expect if economic turbulence happens and what kind of plan you would have ready at that time to weather those conditions. In this way, you can plan for fundraising during economic recession.

Retain your Customer

Ensure you are consistent and maintain a healthy relationship with your customers once you bring them on board. Learn about their experience using your product and if it has solved their problems. Delight your customers and keep them coming back to you with great discounts and offers.

Keep a Constant Check on Analytics

If you do not know your business KPIs related to profit margins, cash flow, production cost, budget, sales, and inventory, then you won’t be able to plan for the worst-case scenarios.

Keep analyzing the numbers behind your business performance, financial history, and day-to-day operations. These figures will help you understand where you will stand out in the recession period and will also guide you during the economic downturn.

Invest in Fool-Proof Marketing Strategies

Since your business will be completely new, you have to plan out your marketing budget and invest in effective marketing strategies that could bring in more leads to your business.

Bonus Read- How Outsourcing Helped Companies Survive the 2008 Recession?

Wrapping it up

Be it a recession or not, initiating and nurturing your relationship with the investors is a smart decision. In case you don’t have your list of investors ready to pitch to, as you have other pending priorities, for example developing your app idea.

For that reason, you need to opt for software development services for startups that have a capable app development team that can ensure you a scalable application. Appinventiv is one such company that can take care of all your product development needs and help you sail through the tough times seamlessly.

[Also Read: Defying Economic Downturns: The Success of Companies Founded During Recession]

For instance, our experts worked for a top job search platform, JobGet, and made the job search process easier for blue-collar workers. Our team’s consistent efforts helped JobGet to receive Series B funding of $52 million during the current economic downturn. The app has been a huge success and is now ruling the app stores.

Other than that, if you already have your app launched and want to improvise it to get better funding in the future, you can still connect with our experts to implement innovative features into the app and improvise its design.

FAQs

Q. What is the best way of raising funds for business during an economic downturn?

A. The best way of raising funds for business during the recession period is to have the right and strong prototype or MVP in place. By building an MVP, businesses can test their product concept with real users and raise money for funding their product development process. With the help of MVPs, startups can lower their risk of failure and boost their chances of success by winning the investors.

Q. What happens to startups in a recession?

A. Sustaining a recession is extremely tough for businesses, especially startups. This means it will be harder for startups to access venture capital. They need to go for various startup fundraising rounds where they would need to give out more equity.

They can also go for an online fundraising campaign on their business website. Once they are ready with their fundraising idea and have finished all the required formalities, the campaign will be live on the website. It can then be shared on various social media channels to create awareness regarding the same in order to get people and startup investors to donate funds.

Q. What is the fastest way to raise money for a business during a recession?

A. One of the fastest ways of fundraising during an economic recession is to seek help from angel investors and family offices like private wealth management advisory firms.

Angel investors, for example, close the deals quickly and are less aggressive in terms of demand. Also, they do not interfere with day-to-day business activities.

Another way to raise business funds is connecting with a private wealth management advisory firm or family office. The importance of fundraising is that they offer more cash than the angel investors and are more mission-driven.