Crisis Funding: How Early-Stage Startups Can Secure Capital During Economic Downturns
Early-stage startups can secure capital during economic downturns but it can also be challenging. Particularly, when founders are reliant on investor backing to keep their small businesses running. You’re also concerned about customers accepting orders, collecting payments, and paying the team.
Early-stage startups can secure capital during economic downturns but it can also be challenging. Particularly, when founders are reliant on investor backing to keep their small businesses running. You’re also concerned about customers accepting orders, collecting payments, and paying the team.
If you were to study historical data, an average economic downturn typically occurs every eight years. At this time, the market experiences a 20% and higher drop in the stock market. The US economy has been running with a bull market for ten consecutive years.
The S&P 500 has touched a record high of over 300% in the last decade. In the previous recession that lasted from October 2007 to March 2009, the S&P 500 lost close to 50% of its value. This “Great Recession” lasted for 17 months, with the economy showing negative GDP growth.
The COVID-19 pandemic was another unexpected downturn that left economies worldwide reeling under the impact. Experts expect another recession to come up soon. This means that startups at all stages of their growth cycle should start prepping for fundraising challenges.
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How Early-Stage Startups Can Secure Capital During Economic Downturns
Judging by historical statistics, you should be prepared for the possibility of a recession and how to navigate the challenges. However, later-stage startups are likely to be hit harder than early-stage companies.
Startups that anticipate making an exit within the next five to seven years are also at risk.
When it comes to valuations, data suggests that metrics remain steady during the initial two years of the recession. The numbers started to drop by 27% two years into the downturn. That’s because, at the start of the recession, investors have sufficient funds to continue deploying capital.
They may disregard macroeconomic conditions until the recession continues for longer, and they must balance their portfolios. Delays in responses also occur because of the lags in GDP advance numbers. These reports are released around a quarter later.
As a result, founders, investors, and other key players may not be aware of the recession up to three quarters after its onset. While venture capitalists may not roll back their investments, they do have more stringent criteria for screening startups.
Investor Criteria for Screening Early-Stage Startups
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