New and emerging technology companies are entering what could be the most challenging business climate in more than a decade. As a founder, you need stability to weather the storm. This is particularly true when looking at the lifeblood of emerging technology innovation and funding.
The venture capital and financing market for technology companies has been booming for many years, with early-stage companies raising significant sums of money and scaling at an unprecedented rate. As inflation soars, GDP growth slows and the economy flirts with a recession, much of that financing is bound to be much harder to come by. The New York Times recently reported that investments in tech startups fell a staggering 23% in the last 3 months.
Venture-based capital does not yet exist for most early-stage businesses that lack a proven track record, proven technology/process, and/or an established customer base. My company, Edge Management, raises capital for tech start-ups, and the main challenge we see from our clients is where to find their next round of funding once they’ve exhausted “friends and family” options.
4 strategies for your business to prepare for a recession
As you prepare for and perhaps reshape your business to weather a recession or at least a tough financing environment, here are strategies to help you emerge stronger from the other side.
#1 Know that emerging areas of technology could be hit harder
You need to keep your eyes peeled for what could happen if the economy experiences a downturn. Some areas of technology are more vulnerable than others, and that is particularly true for emerging areas of technology such as green tech, clean tech, and other sectors where business models are yet to be financially tested. .
Naturally, there will be a bias among investors and lenders towards proven, sustainable and profitable business models. If your company is in a higher risk sector, more conservative financial planning is crucial.
#2 Know your numbers
What is unique about the current economic climate is that after a booming economy that has lasted for more than a decade, you may never have experienced the hardships that lie ahead. This will require reorganizing your thinking about growth strategy and resource investment.
You will need to know your numbers inside and out. The numbers you need to track are:
- burning rate
- Cash Flow Track
- Options to increase the track
- Cost per runway increase
As we will see in the next section, economic uncertainty can also present opportunities for significant growth, but it can only happen when it is not spread too far through uncalculated risk-taking. All decisions must be carefully modeled and budgeted for worst-case strategies and contingency plans.
#3 Prepare for opportunities
While recessions often have negative connotations, the truth is that challenging environments almost always present opportunities for a business to grow. The problem is that most companies cannot take advantage of a bear market because they did not prepare adequately at the start of the recession and therefore are not operating from a strong position.
The thing to remember is that during a bear market or recession, market share is up for grabs at some of the lowest prices ever.
Whether it’s marketing, talent acquisition, or operations, most of your competitors will fold. Increasing your investment in these areas in a down economy is by far the easiest time to outperform the competition for much less cost than in a bull market. But you need to have capital, which is what we’ll cover next.
#4 Raising capital is going to be very difficult (you need a plan)
Coming out of a period when early-stage startups in almost every tech niche were raising big money at sky-high valuations in very early rounds, the fundraising climate changes dramatically in a bear market. . And the signs are already showing in the capital markets. Whereas previously a startup with a great launch at the right time could raise money quickly, now you will need a well-thought-out fundraising strategy with contingency plans and alternative sources of capital.
In previous economic downturns, many tech companies have also turned to raising debt as an alternative to equity. Although the cost is lower, the investigation is usually more stringent. However, it can also allow you to avoid diluting your own stock. This is where being in an emerging tech sector can complicate your funding challenges. High-risk technology areas such as clean tech and green tech are struggling to raise capital in a down market due to unproven business models and financial uncertainty.
Raising capital has been the only option for most companies in this market segment. And as interest rates rise, even the most established early-stage businesses face limited debt options. To continue growth, early-stage companies must de-risk their business models, increase debt from non-traditional sources, or continue to raise capital, even if their businesses pose less risk to traditional equity lenders.
Tech startups in high-risk sectors need to take steps to position themselves favorably for a debt surge before fundraising challenges begin. One tool that many employ, especially in areas such as clean and green technology, is the use of performance guarantee insurance (PGI) to reduce the cost of debt. Basically, by “locking in” your business model, you can reduce your perceived risk in the eyes of lenders and become a more attractive funding target, sometimes even at a lower interest rate.
In today’s venture/interest capital environment, having the backing of major insurance companies becomes even more attractive to businesses seeking financing. Although the financing landscape has changed or slowed down dramatically in recent months, our clients are pushing projects forward at full speed, knowing they will have access to the capital they need.
All of this being said, it is not to say that raising capital is not possible in a bear market. While far fewer companies are funded, those with a great team can often still secure funding. The key is to have an excellent business model and a team to lead it.
FAQs on preparing your startup for a recession
Q: If I am a self-financing business, how should I prepare for an economic downturn?
A: For self-funded businesses, the numbers you need to know are even more important. Not only because you need to know what your current consumption rate and cash flow is, but also because if you run into a cash shortage, the need to increase debt or equity may arise.
Q: What if I’m in the middle of a fundraiser? How should I adjust my focus?
A: Flexibility is key when raising capital. For example, you may be currently raising capital, but as we enter a very unstable environment for capital raises, you should have the flexibility to consider switching to a debt deal or even a creative financing strategy such as insurance. performance guarantee mentioned above.
Q: How can I protect my startup in an economic downturn other than cutting staff?
A: Maintaining cash reserves and raising capital to bolster those reserves before the economy deteriorates further is the best way to put a technology company in a position to weather economic uncertainty.
Q: If there is a recession, how long will it last? Is it better to prepare for the worst case?
A: Most data shows that recessions last 12 to 18 months on average. Your financial strategy should always be to prepare for the worst case scenario and maintain a conservative cash position. It’s easier to raise capital when you’re not in a significant cash crunch.
Recessions don’t need to mean a recession
While the broader global economy may well see a pullback in the coming months, every business cycle has winners and losers, and there is plenty of capital to be raised. Which side you end up on is not determined by luck or a brilliant product, but by the strategic decisions you make in a few key areas: financing, positioning, proactive decision-making, and also calculated risk-taking.
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