Many startups are looking to different investment avenues like venture capital (VC) funding to get their business off the ground. VC funds provide startups with the capital they need to grow and launch their products and services. However, investments may be harder to secure due to many investors being more careful in this current uncertain economy.
Let’s discuss the current economic climate in Singapore, why VCs are slowing down, and tips to help startups do fundraising in a recession.
Startup fundraising in a recession
The economic downturn that began in 2020 due to the COVID-19 pandemic has left many startups struggling to stay afloat. In Singapore, the GDP growth rate in 2021 was promising, and 2022 ended with a rate above the government’s projected numbers. Yet investors remain cautious in investing for 2023. Still, the government remains optimistic for the year ahead/
The Singapore economy and the rest of the world are currently in a state of constant change. In this unpredictable time, as a startup, you may be feeling the pressure and the fear of not being able to raise the capital needed to keep your business afloat. Thankfully, you can use a few strategies to increase your chances of a successful fundraising round during a recession.
Understanding the impact of economic downturn in fundraising
Investments have slowed down mainly due to the risk-averse nature of investors in the current economic climate. War, political tensions, and inflation crimped venture deal flows in 2022, causing investors to become wary. But the decline of the tech valuations made them even more cautious in their investments as 2023 rolled in.
With the impact of the economic downturn, investors’ conditions became more stringent regarding funding new startups. They tend to focus their investments on established companies and sectors likely to be more resilient during bear markets or recessions.
The good news is that even while still feeling the impact of the economic downturn, investors will always be willing to fund SMEs and startups. Bear in mind that investors will be looking for startups with solid business models that can demonstrate their ability to survive when there is a decline in economic activity. It means that as a founder, if you plan on doing startup fundraising in a recession, you need to be able to show investors you have a plan in place to weather any potential economic storms.
5 Tips on fundraising during a recession
Obtaining funds in a challenging economic climate can be a challenge, but it is certainly achievable. Here are five tips to help startups like yours raise much-needed funding during an economic downshift:
1. Identify Your Target Investors
The first step to raising funds in an economic slump is identifying your target investors. Look for investors who are more open to investing in startups despite the current economic climate. Aim for investors who specialise in early-stage investments or have a track record of investing in startups during a recession.
It would help if you research the types of investments your target investors typically make and determine which ones are most suitable for your startup. Researching will help you narrow your list of potential investors and focus your efforts on those most likely to be open to investing in your business. Reading your chosen investor’s investment thesis is also another way that can help you determine whether or not your business is something they would be interested in
2. Analyse the Market and Competitors
To convince investors that your business is worth investing in even while other businesses are feeling the impact of the economic downturn, you must demonstrate a thorough understanding of the market and your competitors. Research your industry thoroughly and develop a comprehensive market analysis, including trends, opportunities, and threats.
It would help if you also had a good understanding of your competitors and their strategies. Additionally, be ready to show investors that you are willing to act on the results of your market research, whether it causes you to reduce operational costs without impacting production or prioritising the products that generate constant revenue. It will show investors you have the knowledge and expertise needed to succeed in a competitive market like Singapore.
3. Prepare a Comprehensive Pitch
Once you’ve identified your target investors and done the necessary research, the next thing you should do to better your chances while fundraising during a recession is the preparation of an effective and comprehensive pitch. Your pitch should include detailed information about your business, including your company’s products and services, market size and potential, competitive landscape, and financials. It might be helpful for you to include cash flow projections and budget plans designed to handle the impact of an economic downturn.
You should also include a detailed plan for using the raised funds and how it will help your business succeed. It will demonstrate to investors that you have a well-thought-out plan in place and understand the risks associated with investing in a startup, regardless of the state of the market.
4. Build Relationships with Investors
Because of the impact of the economic downturn, investors tend to be more risk-averse, so building relationships with them is an absolute must. Try to meet with potential investors and demonstrate your commitment to your business. You should also be open to feedback and be willing to adjust your pitch and business model based on the advice of experienced investors. It will show investors that you are open to suggestions and are eager to make changes to ensure your business’s success.
Present financial statements and a financial strategy to deal with the current economic instability to your existing investors — if you have existing investors. Showing them data on how you are dealing with the impact of the economic downturn will demonstrate that you are paying close attention to your cash flow and the market. Hard data provides a transparent picture of your company’s direction and reassures investors.
5. Take Advantage of Grants and Government Initiatives
The Singaporean government has implemented several initiatives to support businesses struggling with the impact of an economic downturn, including grants and tax incentives. Take advantage of these initiatives and apply for grants to help you access the funds you need to improve your business.
Singapore provides all the resources a company may need, including grants, tax exemptions, and incentives. Their efforts lead to them launching several programs to help the country develop a robust startup ecosystem.
Here are some other grants that may be helpful to whether the impact of the economic downturn:
- Enterprise Development Grant (EDG)
- Productivity Solutions Grant (PSG)
- Jobs Growth Incentive (JGI)
- Financial Sector Technology and Innovation Scheme
It would help if you also looked into Singaporean government-backed VC funds, such as the Early Stage Venture Fund. This fund provides funding to early-stage startups and can be a great way to get the capital you need to sustain your business.
Although it can be challenging, fundraising during a recession is possible. With the right strategy and approach, startups can still secure the funds they need to survive and thrive. All businesses have the opportunity to recover from the impact of an economic downturn by adjusting to the disruptions and finding ways to keep the business healthy.
The downturn comes with opportunities like suppliers providing discounts on essential tools and technologies and some rivals leaving the market. Moreover, businesses can get ready for a recession by doing the following:
- Strengthening their ties with their clients and suppliers
- Minimising debt
- Cutting costs
- Maintaining marketing activity for prospective and current clients
- Setting up an emergency fund for the company
- Improving income-generating services or products
- Maintaining low inventory levels.
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