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Apr 20, 2020

Financing In Times of Coronavirus

“Financing In Times of Coronavirus”,  it goes without saying that raising funds as a young startup may always seem like a challenge but it particularly becomes a struggle during economic downturns.

The current slump we find ourselves in due to the spread of COVID-19 has already resulted in millions of people losing their jobs, significant supply disruptions and businesses losing their revenues. In numerous publications, experts have already advised on the main methods of keeping your business afloat. I personally recommend this one, where the author emphasizes that firms must now switch to survival mode. In addition to this, I would like to present some observations in the form of short guidelines that may be useful for startup founders seeking financing in these turbulent times.

 

1. It is all about the runway

Post Corona VC world is much drier in terms of capital from the recent past. It is dangerous for young startups to assume that they will easily get future funding rounds. Companies will likely have to wait for financing longer than expected or even completely fail to raise investors’ attention.

It is hence vital to prolonging your existence for as long as possible. If you are finalizing a deal, make the money last. Cut all unnecessary expenses; explore the option of terminating your office lease; adapt to a temporary or permanent remote job environment. Focus on your core product and on your customers, as keeping the current ones will be cheaper than acquiring new clients.

Show investors that you can navigate through stormy water and that you have a plan for how to stay afloat for months to come.

2. Break-even ASAP

Downturns are a reminder that the goal of a business is to be profitable so that it can benefit its customers, employees, founders, and investors. Profitability should not be a concept by which you lure and attract investors, but rather an actionable plan that can be achieved sooner rather than later. It does not mean that your company must become a wasteland of no changes or innovation with little to no cost. On the contrary – now is the time for R&D, so that the end product is ready as soon as the situation normalizes. Additionally, it will ease the search for financing during times of coronavirus.

Keep in mind, however, that positive cashflow is the best way to prolong your runway. If this comes at the cost of growth, it is far better to delay an expansion than to completely go under.

3. Accept that valuations have changed

Simple economics rules indicate that lower supply will drive the price down. This is exactly what is happening on the VC scene right now. Small family offices, corporate funds and many other companies have temporarily or completely stopped their investment activity. This automatically grants more bargaining power to players that are still in the game.

As most industries are affected by the pandemic, investment risk is also greater and must be thus reflected in the valuation. This however also means that the valuation trap, that makes it significantly harder to secure future funds, is more likely to be avoided, which can be of benefit for founders.

Remember – it is far easier to outperform a lower valuation, than live up to a very ambitious one. If you survive the downturn without much damage, investors will take it into account in future rounds.

 

The upside

The current market situation presents a number of advantages for scaling startups:
As many marketing campaigns are being foregone, the cost-per-click is decreasing. E-commerce is gaining a staggering-market penetration. Some of the changed consumer trends are here to stay. Most of the “cash only” investors have pulled out of the market by now – If a VC invests in your startup in these times it is a true testimony of the confidence, they have in you and the value they can bring to the business.

Use the time to work on the product, be as operational as possible, and be ready to expand.
This is a time of great founders and the time of funds, that can offer much more than money.

 

Eryk Frontczak