Best Practices

How The Coronavirus Pandemic Will Affect Startup Funding (Plus Five Tips On Raising Capital During Coronacrisis)

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The coronavirus ripped apart economies around the world, plunging businesses into uncertainties. In the US, 7.5 million small businesses are reportedly facing the gloomy prospect of shutting down. Likewise, investors have cut down or stopped funding startups as the economy takes a beating. 

If you’re launching a startup or raising money from investors, you’ll need to be aware that the appetite and landscape for funding have drastically changed. As an entrepreneur, you may need to alter your strategies to grapple with the pandemic effects. 

The state of startup funding in Q1 2020

When the coronavirus pandemic starts hitting major economies, some investors remain optimistic. According to Techcrunch, some investors are taking advantage of the decreasing valuation and a smaller pool of VCs to bagged themselves long-term winners amidst economic uncertainties. 

However, statistics are telling a different reality than the optimism painted by a small group of funders. According to a report by Startup Genome, China, which suffered the initial blow of the pandemic, has seen VC funding drop by 50%.

According to CBInsights, global seed funding suffered a 22% decline during the first 3 months of 2020. In the US, startup investors who have been optimistic during the first quarter of 2020 are likely to withhold a further $28 billion of follow-up deals for the rest of the year.

Most of the investors shy away from taking new risks that are compounded by the uncertainties of the coronavirus pandemic. Instead, they are likely to focus on funding startups that are already in their portfolio. This is vital to ensure the survivability and growth of the startups in the long term. 

The cautious approach taken by investors is validated by the shocking amount of retrenchment, which reflects the dire states of companies serving different markets. In less than a month, Uber has laid off 6,700 of its employees. Airbnb, Lyft, Yelp, and Groupon laid off a total of 7082 employees in May. 

Laid-off employees will find it hard to get back into the workforce soon, as companies start announcing hiring freeze over the pandemic concerns. Google is freezing new hires for both full-time and contract workers. An estimated 68% of companies in the US are unlikely to recruit new hires any time soon. 

Projections for Q3-Q4 2020

While economists are torn in opinions on how the global economy will recover, they are on the same line that it is going to be a slow and painful one. Mark Zandi, the chief economist of Moody’s Analytics, predicts that the global uncertainties will drag on until the middle of 2021, assuming that a vaccine will be developed by then. 

Entrepreneurs hoping to source seed funds or fresh investment for growth are likely to end the year disappointed. Investors just aren’t prepared to weather the storm when the uncertainties are more volatile than ever. They are more likely to concentrate on the companies that are already in their portfolios,

Even if entrepreneurs managed to secure new funds, they would see a reduction in valuation between 30% to 50%.

Advice for startups

Startup owners need to face the brutal truth that they may have to go without funding for the near future. If they are to survive and thrive, it will be due to grit, updated strategies, and thinking out of the box. 

Here are some practical tips:

1.Focus on cash and long-term survival

It’s about time that you take a good look at your expenses. As consumers cut short on spending, you’ll need to increase your cash reserve. This means cutting off unnecessary expenses that will not contribute to the profitability of the company. 

VCs will be more intrigued by a business’s sound financial management strategy than mere big ideas and goals. If you’re still banking on operating at a loss in exchange for millions of users, you need to revamp your business model. 

Your ability to ensure that your business will survive the pandemic increases your chance of getting funded in this challenging time. This may mean looking into various revenue-generation strategies, such as introducing subscription plans and remarketing efforts to existing customers. 

2.If you have the cash to operate ~2 years without funding - focus on taking over the market share. 

As economies plunged into uncertainties, you’ll want to stay calm and plan on taking up a larger market share. Of course, that’s assuming that you have sufficient cash to last up to 2 years amidst the coronavirus pandemic.

With most investors stop funding startups, you’ll be in a prime position to bring in new leads. It’s the perfect time to reduce price, offer free or extended trials for your products and services, or deferred payments. 

The conversion rate may be lower than usual, but the opportunity to provide exceptional services to the leads will mean you’ll have happy, paying customers when the economy rebounds. 

This is the time you’ll need your business to be seen, and you can do so in an affordable manner. Companies may want to consider temporary promotions, non-monetary discounts, or discounts that help build volume. 

If you’re still landing new leads without burning an excessive amount of cash, you may be in favor of investors.

3.Create a new strategy to prosper

Winston Churchill once mentioned, ‘Never let a good crisis go to waste’. Therefore, your thoughts shouldn’t be focused merely on survival during the pandemic. Instead, you’ll need to strategize on how you could thrive by riding on the changing industry trends.

Are you on track on digitizing your business? If not, this is the right time to do so. Capitalizing on digital trends and analytics will give you a good direction on how consumers are spending and where you could effectively market your business.

Embracing technology goes beyond acquiring new customers, but also reinvent how your team could work while staying safe during the pandemic. Take full advantage of remote working tools, and at the same time, you can reduce operating expenses by reducing or giving up an office space. 

The COVID-19 pandemic also exposed flaws in the supply chain of many companies. If you’re strongly reliant on manufacturers in China, you’ll want to start diversifying your suppliers. Look into the possibility of sourcing from other countries, such as India, Indonesia, and Vietnam. 

Your ability to survive and thrive will also hinge on the efficiency of internal operations. Take a more in-depth look into existing procedures and cut off unnecessary red tapes that hinder progress. A flatter organization means it’s easy to get the message across and more agile than bloated competitors. 

4.De-prioritize risky new investments and ventures.

Entrepreneurs are known to be enthusiastic risk-takers. However, with established trends thrown into disarray, it will be prudent to scale down on new ventures and investments. There are just too many unknowns that are affecting the business landscape.

Questions like ‘when, or if, a vaccine will be available to the public?’ and ‘how to balance restarting economies without compromising safety?’ will determine policies that govern how businesses operate during the pandemic. 

Demands in specific industries have also plunged to an all-time low. The tourism industry is predicted to record 100.8 million job losses in 2020. The recent Airbnb’s layoff is a measure to “reduce our investment in activities that do not directly support the core of our host community”, according to its co-founder.

If you’re thinking about expanding your workforce or venturing into a new market, you may want to put the ideas on hold until things stabilize into a new normal. 

5.Leverage government support programs.

With VCs tightening on startup funding, businesses ought to take full advantage of government support programs. Various counties have launched stimulus programs to help local businesses weather the impact of lockdowns and the economic impact that ensued.

Germany has announced a $2.2 billion aid for startups, while the UK has approved a $1.6 billion' Future Fund" targeting tech startups. In France, $4.4 billion was injected to help startups survive the pandemic. 

If you're a startup in the US, you may benefit from part of the $2 trillion stimulus package announced by the government. Companies with less than 500 employees can apply for small business loans made available through the aid. 

Any form of help will increase the chance of your company surviving the fallout from the pandemic. So, find out if you qualify for the aids in your country and apply for the funds. 

Summary

It is indeed an unprecedented era when potential startups are deprived of investors' funding due to the coronavirus pandemic. However, it's an opportunity for building sustainable strategies to make businesses more resilient and leverage changing trends in the foreseeable future.

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