How to Raise Finance in a Recession
It is undeniable that we are currently living through troubling times, and this is inevitably having a negative effect on the strength of the economy.
This paired with the uncertainty of our position in the global economy post Brexit means that raising finance for your business can seem like an impossible task. But fear not, here are some useful tips on how to obtain investment.
How Recession Proof Is Your Business?
Not all businesses will be affected by the financial storm in the same way; some will even see a rise in investment interest. The first step is to analyse if your business is one of these. Investors, like business owners, will have survival and security in the front of their minds during hard economic times, and so are more likely to play it safer and invest in industries which have a track record of doing well during economic downturns (e.g. discount retailers) or play into current issues consumers are facing. For example, if you have a cleaning or sanitisation-based business, COVID 19, as awful as it is, has probably greatly increased your profits and the number of financial investors who would like to place their trust in your success. However, if you are in the luxury goods market, let’s say you’re trying to launch a luxury fashion brand which focuses on heels for glamorous evening occasions, investors may be less keen to get involved.
Even if you are not lucky enough to have a business geared towards current consumer needs, having proof that you have low debt and steady cash flow can give investors some comfort, maybe even enough comfort to invest. However it is historically proven that investors are less likely to rush towards more uncertain investment opportunities and are more likely to bank on established companies which have proven they can weather economic storms.
Investors are predominately after one thing: capital. They may be more lenient and take a chance during more certain times, as there is room for risk. But in recession, they will want to see their investments reap rewards more than ever, and faster than before. Any business looking to grow should focus on profit, but this is even more vital during recession. You want to be able to show potential investors an impressive profit margin to increase their trust in you. Also be prepared for the fact investors will probably not invest quite as much capital as they may have done outside of an economic crisis. Planning your investment to come from a wide variety of different sources is crucial. Investors may have money to offer, but most of them have not been left untouched by the recession. If one investor pulls out of your business or finds themselves facing economic uncertainty, it is good to have more financial pillars supporting you, rather than just one.
Accept Ownership Dilution
During more certain times, a business owner or entrepreneur will often tend to over value their company, and then an investor will try and decrease this valuation and increase their own percentage of ownership through their investment. In normal circumstances, the entrepreneur has more bargaining power in most cases, but this power balance is flipped on its head when there is an economic crisis, as there is far less dispensable capital in the wider market. The sad reality of raising finance in an economic downturn is that you may inevitably need to give away more ownership of the business than you may have originally planned to.
Streamline Your Business
Streamlining can be really hard; but it may be the best thing you ever do for your business. It is easy when you are passionate about your business idea, to want to explore new ventures, create other mini projects inside or outside the main business, and try to expand into many different areas.
However, during economic downturns, having a clearly laid out path for the business, with no over complication, is one of the best ways to attract investors. Under-performing or experimental projects are not worth the risk and taking your team and driving them all towards one common goal will inevitably help support the core of your business. If attracting investors is crucial to you, you need to present them with a solid foundational premise of what you do.
More Than Finance – Invest In Employment
The high rate of unemployment is one of the most devastating impacts of a recession, but it may provide a rare upside for your business. The amount of quality potential employees skyrockets, meaning you may be able to snap up an invaluable team member, who may even be slightly overqualified for the position you have on offer, if you are able to provide them great employee benefits. Many bright sparks may be putting their own dreams on hold whilst there is so much uncertainty and are therefore more likely to be looking to work for another budding company. Money is a great asset to have, but make sure you don’t undervalue the importance of having a great and reliable team behind you!
Take Advantage Of The Small Pool
Believe it or not, there are downsides of economic surges too! One of which is the highly saturated market it creates, making it hard for you to stand out and be recognised by key investors. Gaining the attention of customers and investors alike is a lot easier when less companies are thriving or being started. Essentially, the pool has shrunk, and you now appear to be a bigger fish as a result. Use this to your advantage and start building traction for your business, helping you to gain interest from investors and the public, and emerging from the recession more well-known than before it.
Excess Capital- More Harm Than Good?
Securing investment can seem like the be all and end all for many businesses, but there is such a thing as raising too much money. Going through economic hardships can be good for your business’ long-term growth, as it educates you to get the most out of the resources you currently have, making you a leaner company long term. Many companies who get excess funding tend to stagnate, feeling pressure from their investors, overly keen to deliver, and so end up developing overly complex and expensive products.
Time Your Investment Hunt
It is not always possible, but keeping an eye on when your investment opportunities may be looking up can make all the difference. At the start of the downturn, there will be uncertainty about when things will pick back up, and so investors are less likely to be searching for potential businesses to invest in. The best thing you can do is keep yourself aware of the ups and downs in the economy and the stock market, and also consumer trends which may make the viability of your business increase.
Ultimately, funding or not, if your business emerges from the economic crisis, it will be stronger than before and ready to face any future adversities, remember; diamonds are formed under pressure!