Have you tried funding a startup this year? If so, you know that now is a challenging time to pitch venture capital or angels. Even PE deal funding was down 20% vs. last year, showing a significant pullback. Despite the challenging market conditions, there are proven ways to fund a startup during a recession.
Can you start a business in a recession?
Recessions are a great time to start a business because the shifting markets create opportunities for young, agile companies. There is a long history of America’s best businesses starting during recessions. Big names like Microsoft, Netflix, General Electric, and even MTV all started during recessions and have survived decades.
However, a recession is a challenging time for funding a startup. Capital shortages mean startup investors become pickier about which business they are willing to invest in.
What happens to startups during a recession?
Startups traditionally lose money for many years investing in growth and product development. As a result, they need new investment funding every year or two in what is often referred to as a raise-burn capital plan. From 2010 to 2021, a glut of startup investors focused fueled a boom in angel and venture capital, and funding a startup was relatively easy.
With interest rates rising and the prospect of an economic recession, financing a startup is not as easy as it used to be.
The amount of angel and venture capital shrinks during a recession. The result is less startup capital to compete for, worse terms for founders, or a failure to secure startup financing.
How to fund a startup in a recession.
Operating cash flow is the best way to fund a startup in a recession. Business profits are not dependent on capital markets and create no dilution amongst existing shareholders. Focus on business fundamentals like boosting margins, operating efficiency, developing your team’s strengths, and honing in on your market. These short-term tactics not only increase cash but also build long-term strength.
Consider reducing R&D in favor of growing your core product or service. Cuts to R&D hurt long-term growth but often help your startup’s financials in the short term by doubling or tripling profit.
Take care of your existing investors who already have skin in your business. Maintain good investor relations through regular communication and engagement to motivate them to re-invest in your business at the right time.
If your business cannot achieve profitability or has not yet launched, you need to seek capital from sources other than angels and VC. Great options for financing a startup include the following:
- SBA loans (especially for targeted founders: veterans, minorities, women, and disabled people)
- CDFI loans
- Economic development grants
- Friends and family
Be agile and resourceful.
Opportunities appear and disappear quickly in a recession, so most agile and resourceful entrepreneurs win. Dump your business school playbook and go guerilla: how can you launch your startup on a shoestring? Where can you shift your product to monetize ASAP? How can you shorten the time to product launch? How can you do the same work with 30% fewer staff? These tactics not only get you by in the short term but also strengthen your competitiveness in the long term, making you a prime candidate for funding when the recession ends.