5 Tips on Raising funds for business post-COVID-19
Raising funds for a new business or even expansion of an existing one could be an arduous task. To be honest, it is a challenging task and it’s always going to be so. All the more now when with the economic downturn caused by the global COVID-19 pandemic has people questioning their futures and livelihood. Raising capital in a post-COVID-19 world is going to come with a lot of obstacles and it’s only smart to make preparations for it. In the new era that we are stepping into, patterns in business transactions are going to change. And if you are just starting out with a new idea or looking at growth options for your business, here are some tips to get you started with fund-raising for your business.
Note: Innovation, growth and expansion is nor really impossible in uncertain times. Take the example of video conferencing tool Zoom, that scaled phenomenal growth in the number of participants from 10 million in Dec’19 to 300 million in Mar-April 2020 (Source: The Verge).
The opportunities multiply if your product idea is backed by technology, especially cognitive technologies. Considering the norms of social distancing and remote working in the near future, techs like Artificial Intelligence and RPA are to steal the limelight for certain. So, if you are trying to raise funds for offering a service through intelligent products like an AI powered mobile app or any other, consider your chances to be higher. On that note, let’s take a closer look at exploring different funding options for your business post the coronavirus pandemic of 2020.
How to raise money to fund a startup business in uncertain times:
To start with, planning for capital is imperative for success in the post COVID-19 world. The tried and tested fundraising strategies and options might need a new approach, and the blueprint for fundraising needs to be thoroughly foolproof. Private equity (PE) and venture capital (VC) investments are going to be all the more thorough, return-oriented and require a strong affirmative to the question, “Why should I invest in this?”
On that note, let’s commence the discussion on how startups can raise funds for their business in 2020 and beyond.
Crowdfunding: A smart fundraising option for startups
In the last few years, the option of crowdfunding a startup business has witnessed a steep rise. Reason? It follows the simple rule of people using a crowdfunding platform to fund companies for a product or service, and either being rewarded on its success or having the amount returned (on its failure) through an automated system.
Fundraising through crowdfunding has several advantages, the most prominent being that with minimal risks involved individuals/companies can raise as much funds as they can from the public. Through different crowdfunding options like debt, equity, or donation, companies usually can raise from US$ 10,000 to US$ 100,000 through crowdfunding. Crowdfunding naturally is a smart choice in a sluggish economy, as people do not have to commit large sums – a small amount from many people is enough to kick-start a project.
For example, consider the case of building a video-based messaging app. There are already existing products in the market in which case the product might not immediately garner curiosity and interest among venture capitalists. But crowdfunding is a possibility. As a top AI powered mobile app development company, we have built top-notch apps for US$ 50,000 – US$ 70,000 – a sum that can easily be raised through crowdfunding options, without having to struggle with VCs.
Crowdfunding is a popular concept for supporting startups with capital in countries such as the USA and in Europe, and is gradually gaining popularity in other countries (Eg. in Ireland, it is an upcoming concept). Platforms like Patreon, Kickstarter, or GoFundMe are some of the most popular choices for crowdfunding options.
Getting funds through Grants and Loans:
Another suitable resource for gathering capital at this point is grants given to businesses (usually by governments and/or corporates) during COVID-19. When it comes to grants though, there is usually the idea of the product/service having a socially positive impact on specific areas such as education, healthcare etc. and comes with certain limitations on how the grant can be spent.
The Verizon Small Business Recovery Fund in the U.S. is one such example that is offering grants as capital for businesses in the U.S. of up to US$ 10,000 to SMEs. They are more focussed on enabling entrepreneurs of color and women from underprivileged communities. Verizon has invested $2.5 million in this initiative.
When it comes to taking a loan (usually from a bank or financial institution) the conditions are slightly different. Loans can be either secured (required collateral/assets) or unsecured (offered without collateral usually by checking credit history. For a startup, it is usually challenging to secure loans from a bank, without a sales history to open a credit line. Moreover, considering the current economic crisis, many governments are facilitating easy loans commission to tackle the immediate liquidity problem, but in the long run, if the startup/business is not able to operate, this additional liability will be a matter of concern.
It is in these times that many SMEs especially can look at FinTech solutions, considering traditional channels are restricted. The impact of FinTech on global industries has been phenomenal in the last decade. From automotive to insurance, FinTech solutions have been explored relentlessly. This has not only expanded FinTech’s reac but also chartered a new pathway for FinTech lending for Small and Medium Enterprises (SMEs). FinTech lending models are usually faster, transparent and thoroughly technology driven (usually AI and Blockchain), which helps to evaluate risks associated, draw insights through data analysis, and provide funds.
Finding Venture Capital to fund business:
According to CBInsights, in the first quarter of 2020, global corporate venture capital fell by 13% in comparison to the fourth quarter of 2019, from US$39 billion to US$34 billion. In another survey conducted by 500 startups, 42% of investors indicated that they would allocate less investment to startups and 84% indicated that early-stage investment activity would be negatively affected.
It’s only but natural that without an impressive portfolio, VC investments are going to be tough. It always was and still is. After all, VCs too are in quarantine and their investments are in deep waters. As businesses prepare for a world post the COVID-19 crisis, investment opportunities are likely to rise, but early stage financing (Series A) will be tough to get by. Terms of investments will also alter as VCs will look for stronger security clauses (eg. flexible closings, liquidation preferences etc). It has been seen that with limited revenue-inflow in the last quarter, even some of the promising funded startups have had to cut manpower, reduce operations and infrastructure costs etc. so as to keep the show running.
So why consider this option at all? Because venture capital funding is the smart way to take your business to the million dollar mark. The secret to securing VC funding is that your product has to be one that has a long-term use and potential for return. If VCs feel that the product is a fad or will not be able to deliver profits, it’s a lost case. One proven tip to get VCs keen is to back your product with Artificial Intelligence solutions. It’s no secret that AI is the game changer across economies. Even in turbulent market conditions, reliance on AI is at its peak. From biotech to education, AI and machine learning solutions have never been dim.
For instance, if your business is deploying AI based chatbots for EduTech, the product has higher potential for attracting VC’s attention. Delivering lesions is predicted to move to digital platforms at least for the next 6 months; with schools and institutions unable to deliver F2F physical lessons, there’s going to be higher reliance on need-based tech solutions for addressing the challenge. In this product, VCs will see a long-term potential across global markets, and hence likely to meet their profit goals.
Gathering business capital through Equity Funds
Another source that can help sustain through these tough times is raising capital via equity funds. Equity funds are relevant for early-stage startups and established MNC’s and investors can range from corporates, high-net-worth individuals (HNIs), Private Equity firms, to Venture Capitalists.
However, before exploring this option, it would be wise to determine the timeline and plan accordingly. Understanding and determining the amount of risk is critical before considering equity funding. Business funding in a post COVID environment should also explore avenues such as options with the regional CARES Act, state-funded initiatives, and other alternative forms of non-dilutive funding.
Startup funding post COVID-19
It is said that even the darkest clouds come with a silver lining, and that’s a very good thought to nurture. We are in troubled waters and things do look gloomy and forlorn at the moment. But let’s just say, there are better days ahead of us.
We at Day One Technologies, have seen startups glow and flourish; we have witnessed innovative products secure huge fundings; and as a top AI development company, have observed the role of technology in navigating startup success even in the most competitive markets.
The COVID-19 impact on investments will be brutal, but wise. The market of tomorrow is meant for the fittest, with little place for junk and mediocre. As a startup or an existing business, the time is right for accepting the difficulties of 2020 and preparing for a better 2021. And if you think that you need a small nudge or want to give a realistic shape to the ideas in your head, let’s talk and discuss!