Are you worried about how you will raise capital in a recession? Don’t give up before you’ve started. The negative news cycles about the local and global economy don’t need to spell disaster for your next funding round. And your path to access fresh capital is by no means blocked – far from it. Read on, and let us take you through some expert tips on how to raise capital in a recession and beguile investors with your venture.
Recessions past, present and future
Australia is often described as the lucky country and with good reason. According to the US National Bureau of Economic Research (NBER), recessions occur every six years or so. But in Australia’s case — apart from a brief flirtation with COVID-19-induced negative growth in 2020 — our economy hasn’t had a recession since FY91. Economies are described as being in a technical recession if they experience two consecutive quarters of negative growth in per capita GDP. Although, NBER describes a recession as a period between a peak and a trough in the business cycle marked by a sizable decline in economic activity. Regardless of how recessions are defined, these downturns can last from a few months to well over a year.[1] And they can have a profound impact on both businesses and society more broadly.
Has our luck run out?
With the US and UK already in recession and the Eurozone heading there this quarter,[2] savvy founders should plan for Australia to follow suit. Boom turns to bust. It’s part of the normal business cycle. But what if you are planning to raise capital? Or you unexpectedly need additional funding to keep your venture afloat and dreams alive? Although most Australian founders have navigated the challenges of the COVID-19 pandemic, most haven’t experienced the nation’s recession of the early 1990s. Even if you were an Australian founder who was working or was an entrepreneur during the 2000s, you’ll most probably also have dodged the worst of the global financial crisis (GFC). So we’ve assembled expert tips to help you raise or find the capital you need to thrive or survive until the looming recession is over.
1. Knowledge is power
Alex Gold, Founder & General Partner of Harvest Venture Partners, has seen first-hand how investors will readily invest in start-ups with minimal, and very occasionally no due diligence. However, when times are tough that pattern is reversed and it can be incredibly challenging to attract and onboard investors.[3]
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Be sure of your business stage
In a tough market, it’s vital to know the stage your start-up has reached. That way you can identify what type of funding round, e.g. seed, Series A, B, C or D is right for you. Identify the types of investors you should be targeting and what alternative sources of funding you might be able to access, in addition to or instead of, equity capital. For example, if you are working on innovative ideas, your R&D may be eligible for the R&D Tax Incentive (R&DTI) refund and R&D financing. Equally, if you’re at an earlier stage, it may be better to woo an Angel Investor, rather than chase Venture Capital (VC). To find out more about the differences between Angel Investors and Venture Capitalists and which one is best for your business, read our article, Angel Investor vs Venture Capitalist: which is better?
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Crunch the numbers
Make sure your accounts and business plan are current, detailed and on point. Few things appeal more to potential investors than ventures with strong cash flow, plus revenue and market share that are trending up. If you can’t paint that picture, show that you’re all over your burn rate and have built a long and stable runway to secure future growth. Whatever stage your business has reached, before you raise money from investors, get your company valued by a certified third party. An independent, accredited valuation is an objective measure that will reassure potential investors about your start-up or scale-up. It can often provide you, as a founder, with valuable insights into your venture, including what you could and should raise in terms of equity. Use the data from your accounts, business plan and valuation to decide how much funding you need to reach your goals.
2. Pitch with precision
You rarely get a second chance with an investor, so make sure what you say hits the mark.
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Take a targeted approach
Even during the boom times, it was a smart idea to ensure you identified investors that would be most likely to fund your innovation business. Now, you need to be taking an almost forensic approach to this process to increase your chances of success. Start by calling on your network to help you identify your best investor prospects. From consultants and advisers to accelerators and incubators, forge new connections with professionals and organisations that help start-ups and scale-ups succeed.
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Pitch perfect
Once you’ve curated your list of potential investors, work on your pitch. Make sure you’re able to quickly and effectively communicate what your start-up or scale-up does. Step investors through the problem you’re solving and explain why it’s important. Describe your target market and include details of its size, accessibility and growth potential.
There are winners and losers in every economic downturn. Think Airbnb during the GFC and McDonald’s following World War II. If your business is likely to profit during the imminent recession, don’t hesitate to say so. Equally, if you already have a minimum viable product, for your product or service, include it in your show and tell to investors. Remember to include information about your business plan, financials, team and company structure, legal documentation and details about your network. A cohesive team, effective structure and well-run operation are high on an investor’s wish list, especially during uncertain times. For more tips on how to communicate to potential investors, read our article, Why communicating innovation is crucial for your start-up.
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Embrace technology
Establishing a strong brand, visual identity and key messaging are essential elements to landing investors. There is technology aplenty to help you develop and deliver your pitch. So don’t shy away from using it. Consider a digital information memorandum website. It’s a fresh alternative to emailing a PDF and allows you greater flexibility in terms of imagery and video. Crucially, you can monitor who is opening it, and which parts they are reading, which can provide valuable insights.
3. Be flexible and realistic
Being agile, accepting the situation and playing the cards you have to maximum effect are the three elements that will help you land investor funding.
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Adjust to the conditions
Keeping a glass-half-full mentality is crucial for any innovation business to successfully navigate a recession. However, it’s important to be realistic and have a flexible mindset so you can adapt to the rocky road that may lie ahead. Accept that if you want to raise capital from investors, you’ll need to give up more equity and become more diluted. The valuation of your business is also likely to be less than what it would have been six months to a year ago. And it’s likely to take longer and be harder to land a financial backer during a recessionary cycle. Read our article for the latest insights into innovation funding trends, Innovation funding trends founders need to know about.
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Cut costs
Cutting any non-essential costs, for example, side projects, in a recession is a good idea for two reasons. Firstly, it improves your cash position, moves you towards or improves your profitability, which makes your business more appealing to investors. Secondly, it will reduce your burn rate and extend your runway. So if you can’t land the equity capital you want, you’ll be better placed to weather the storm until the recovery arrives. To find out more about cutting costs, read our article, How to slow your burn rate and extend your runway.
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Consider alternative finance
If you’re not able to raise capital over the coming months, don’t despair. Equity crowdfunding and debt financing, particularly from alternative financiers are other avenues to explore. Birchal, an Australian Equity Crowdfunding platform, helps ordinary Australian consumers invest in new Australian brands. Then, there’s Tractor Ventures for revenue-generating businesses in Australia and New Zealand. Tractor Venture’s revenue-based finance offers non-dilutive loans from $50,000 to $1 million for companies with minimum monthly sales of $15,000. R&D financing is beneficial for businesses with eligible R&D. Whether your business has no revenue or a $20 million aggregated annual turnover, if you’re claiming the R&DTI refund, you can apply for R&D financing with Radium Capital. A Radium Advance from Radium Capital is R&D financing that lets you access your expected tax refund early. With no minimum or maximum loan sizes, our financing is uniquely scalable and flexible to your innovation and growth needs.
Talk to the experts in R&D financing
If you’ve dotted the i’s and crossed the t’s, but capital raising in a recession ends up not being the best option for your venture, maybe R&D financing can help? If you’re not sure whether you can claim the R&DTI and access your refund early, don’t hesitate to reach out to one of our R&D finance experts. We’re happy to give our time to support Australian innovators. Our team can listen to you, assess your situation and if need be connect you on a no-obligation basis with our network of start-up and scale-up experts and service providers.
If you qualify R&DTI refund, the good news is you can apply for a Radium Advance to access up to 80% of your tax refund in just a few business days. Use the capital to reinvest in more R&D or for business cash flow. The choice is yours. Our R&D loans are non-dilutionary and cash-flow friendly too. With no fees or repayments until your R&D refund arrives, and fixed interest rates, we offer affordable finance you can count on. Contact our R&D finance experts to find out more.
[1] Reserve Bank of Australia. 2022. Recession | Explainer | Education | RBA. [ONLINE] Available at: https://www.rba.gov.au/education/resources/explainers/recession.html.
[2] Kenneth Rapoza. 2022. Europe Is Heading For ‘Deep Recession’, Deindustrialization. [ONLINE] Available at: https://www.forbes.com/sites/kenrapoza/2022/09/11/europe-is-heading-for-deep-recession-deindustrialization/?sh=22cc1b2f4708.
[3] Alex Gold. 2022. Coronavirus and a Looming Recession: How to Raise Capital in Uncertain Times. [ONLINE] Available at: https://www.entrepreneur.com/money-finance/coronavirus-and-a-looming-recession-how-to-raise-capital/346885.