There’s no denying that an economic downturn has a big impact on small and medium businesses. Banks tighten up their lending criteria, friends and family don’t have extra money to put into new ventures and you need to protect your personal assets, too. This hasn’t slowed down the appetite for funding, though, with many entrepreneurs looking to venture capital (VC) firms to get startup money.
That’s not to say it's easy — previous economic recessions have led to steep drops in VC funding commitments. Venture capital is still available, though, with more than 30 billion invested by VC firms in Q1 2020. Like banks, VCs are working to strict standards, with a lower appetite for risk and more restrictive investment practices. This means you can still get funding; it’s just going to require more effort.
As TechCrunch says, “The best-performing vintages tend to be those that invest at the nadir of a downturn and into the early stage of recovery.”
Let’s explore what that means to your startup.
Find Venture Capital Firms That Still Invest During Recessions
As VC companies tighten their wallets, entrepreneurs would be wise to focus on the main firms that are still making deals. This includes:
Andreessen Horowitz: One of the most established VC firms, a16z as they’re known, has launched a “Talent Opportunity Fund” and they provide extensive resources and advice to help startups survive at all stages.
Green Cow Venture Capital: Green Cow is an early-stage fund that specifically looks for startups that prove they can thrive during a recession or downturn. They look for strong business fundamentals when making investment decisions.
Sequoia Capital: This VC firm has been in business for around 50 years and has announced a $7 billion fund in direct response to the 2020 economic crisis.
NFX: This VC firm looks for companies with strong “network effects” and launched a specialized fund to deal with downturns in 2020.
Focus on Sectors and Industries That Are Resilient to Downturns
During a recession, VC funds want to invest in startups that have proven resilience. These types of startups typically have national or international reach, are technology-based, can be accessed remotely and solve a genuine user need. The vertical categories currently attracting the most VC interest are:
Enterprise Software as a Service: Cloud-based technology, platforms and applications that large businesses pay for on a subscription basis
Financial technology (FinTech): Software and apps designed to demystify the world of finance and make money management more accessible
Life sciences: Research-driven businesses providing products and services based on physiology and behaviors of humans and other creatures
Healthcare IT: Information technology providers for healthcare businesses, providing services like easy medical communications and patient health records
Education technology (EdTech): Software and apps that facilitate lifelong teaching and learning
Cybersecurity: Technology and methods to protect businesses from attack by criminals and hackers
Logistics: Platforms, products and services that make it easier to manage the supply chain and move products between different points
Remote working: Technology and services that make it easier to communicate, collaborate and meet business needs while working from home
You will need to prove that your startup has a proper market fit and a customer base that’s not going to abandon you. This will involve deep market research, testing, understanding use cases and providing truly valuable, versatile products and services.
Demonstrate Proven Business Success Indicators and Strong Financial Management
VCs use multiple criteria when deciding to invest, but as their appetite for risk declines, they focus much more on proven business data. This means they’ll be looking for solid metrics that demonstrate the potential for growth and good financial management:
Cost of acquisition: How much it costs you to acquire a new customer
Cost of retention: How much it costs you to keep a current customer
Marketplace fit: The research you’ve done to prove demand for your products and services
Cost of procurement or manufacture: How much you pay to produce the products or services you’re selling
Gross and net profit margins: How much you make on every sale
Monthly burn: The amount of money you’re spending every month to keep the lights on and develop and sell products
Runway: The amount of money you currently have invested and how long it is going to last
These are just starting points for the data you’ll need to provide. Here’s a great breakdown of the main things VCs are looking for.
Create a Powerful and Persuasive Pitch Deck
Although getting VC funding isn’t all about the pitch deck, it’s still a vital part of your approach to funding. There’s plenty of great advice on developing an excellent pitch deck, but in summary, you will need to show:
A compelling vision: This is your immediate “value proposition” — how you’re going to add value to your customer’s lives and give them a reason to use your products and services.
The problem you are solving: Great products and services exist to make our lives better. Clearly identify the problem and how your well-thought-out product or service that customer requirements in a unique and appealing way.
Strong business success and financial indicators: This is covered in the previous section.
Excellent market fit: Provide in-depth market research and customer metrics that show you’ve developed and refined products to meet specific needs and use cases.
Proven track record: Nothing suggests a successful business like previously running a successful business. List previous accomplishments and successful exits.
Strong team that can deliver: In a startup, no one can do everything alone. Demonstrate a wide-ranging, diverse team that has the necessary skills and experience to develop relationships and products.
Revenue and business model: Show how your business offerings will make money and provide your forecast (or actual) revenue, profit margins and model.
Competitive landscape: Provide an analysis of who your closest competitors and established players are in the industry, and how you plan to differentiate.
How funds will be used: Provide a breakdown of exactly how you plan to use the VC funds to grow your business.
Exit strategy: VCs always want to know how they will get a return on their investment. Lay out reasonable scenarios for how an exit might happen.
Keep Pushing to Get VC Investment
Finally, don’t give up. It might be more difficult to get VC funding right now, but perseverance is key. Use your learning from VC pitches to sharpen up your pitch deck and presentation, and keep at it. You can get there.
Paul is a freelance writer, small business owner, and British expat exploring the U.S. When he’s not politely apologizing, he enjoys hats, hockey, Earl Grey Tea, mountains, and dogs.