How to find pre-seed capital when the economy is shrinking

Background: Pre-seed investment typically happens at the start of the funding process, before seed funding and other further phases as VC funding — funding stages before pre-seed funding could include bootstrapping using the startup owner’s personal funds or an initial round of angel investments.

Pre-seed investors essentially invest in an idea based on a prototype. They give money to businesses at this stage in exchange for equity, which allows the latter to start creating their products or services. 

While pre-seed funding is usually not large enough to qualify as an official round of funding, in order to provide the groundwork for anything significant that has the potential to disrupt an industry, it is essential for some startup owners to receive this infusion of capital.

Where entrepreneurs can find pre-seed capital during a recession

It is now common knowledge that the U.S. economy is set to tip into a recession in 2023, according to almost 70% of leading academic economists, reports the Financial Times. Based on the Financial Times’ latest survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, “Mounting headwinds for the world’s largest economy after one of the most rapid rebounds in history, as the Federal Reserve ramps up efforts to contain the highest inflation in about 40 years.”

Fundraising during an economic recession can be challenging, but there are things you can do as an entrepreneur to increase your chances of securing funding and surviving an economic downturn. 

Tip 1: Acknowledge the VC landscape – It is important for a startup to understand the VC landscape during an economic downturn. VC money is bound to be tight during a financial recession. So while some investors may still be inclined to invest in businesses that are just taking off, they will, quite understandably, be selective about where they are willing to put their money. 

On the one hand, these investors may search for good opportunities for allocating their money and protecting it from inflation, even when a high risk is involved. On the other hand, they may choose to invest their cash in bonds, which may risk mitigation in a recession and also give better returns. 

Tip 2. Have a sector-specific focus – A lot relies upon the sector that a startup is operating in. By and large, fundraising slows down for the duration of an economic recession, and corporations have to be extra selective with the investments they make. Nonetheless, a few sectors are bound to encounter a larger slump than others.

For instance, during the Great Recession of 2008, the technology sector was hit especially hard. As a result, investment for digital startups substantially decreased, and many businesses were compelled to fire staff or go out of business altogether.

The healthcare industry, in contrast, performed reasonably well. In fact, fundraising for healthcare startups rose as investors recognized the sector’s potential.

The bottom line is, understanding how your industry is likely to perform during a recession is essential for startups. You may need to modify your fundraising plan if your industry is one that is particularly susceptible to financial crises.

Tip 3. Have a well-thought-out plan for how to spend the money raised – Having a strong business strategy is essential for startup funding during a recession. Companies having a well-thought-out plan for using the funds they acquire will attract the attention of potential investors, who will also demand proof that your company can be successful and has room to expand.

If you are looking to raise capital during a financial crisis, you must have a robust pitch that outlines how your startup will survive — and flourish — in tough economic conditions. You must be able to convince the investors that your business model and ability to generate revenue are viable. In addition, your business plan and risks will be subjected to tough questions from investors.

Tip 4. Think long-term – Having a long-term vision for your organization is just as crucial as having a sound business strategy. A detailed strategy for how you will expand your firm both during and after the financial crisis will demonstrate to potential investors that you are considering the future.

Make sure people understand how recession-proof your company is when you’re fundraising during a downturn. Describe why people will still need your product or service even if the economy weakens. Explain your ideas for development and growth and demonstrate how you’ll make money even through adversity.

Also, work out projections on how the financial crisis will affect your business and what its real potential will be.

Tip 5. Concentrate on revenue – When seeking money during a recession, it is also crucial to keep in mind that VCs will prioritize businesses that are driven by revenue generation. They will, therefore, seek out companies that have a distinct route to profitability. Do not be afraid to present investors with market data that demonstrates the potential revenue for your product.

You have a better chance of obtaining funding amid a financial crisis the faster your product idea can be brought to market. If you’re raising money during a recession, it is crucial to concentrate on concepts that can be swiftly commercialized and create income.

Talk to us about how our back-office services let entrepreneurs focus on building their business.

Tip 6. Include other sources of support and investment you have received – If you’ve secured investment from angel investors or family and friends, make sure potential VCs know about this. You will be able to attract investment even in tough economic times if you show there is interest in your company.

Furthermore, be sure to tell potential investors if you have generated revenue or secured customers. This will tell them that your business is viable and that there is a legitimate market for your product or service.

Don’t forget to highlight the amount of work you have already put in to bring the company to life. For instance, let them know if you invested your own funds before raising capital. That will give potential investors more confidence that you will make their money work.

Tip 7. Be willing to accept less money – An economic recession can make fundraising more challenging than in good economic times. Consequently, startups may have to accept less money from investors as well as give up a greater share of their equity.

This does not imply that you ought to accept any offer made to you. On the contrary, it is still vital to bargain with investors and secure the greatest offer. However, you might need to be ready to accept less money than you would in an economy that is doing well.

Remember, in difficult circumstances, many startups and new businesses that could have raised record sums of money in good times may receive a substantially reduced valuation from VC investors.

Tip 8. Be practical about the amount of cash you want to raise – Investors are more inclined to support a firm that has a lower funding requirement. This is due to their perception that there is less danger when they invest in a business that is not trying to raise a lot of money. Possessing a solid plan and being realistic could be essential, particularly in a pre-seed round.

Being realistic about the amount of funding you need from investors is crucial while conducting fundraising during a recession. Avoid asking for more money than you need, and be willing to accept less money than you had anticipated.

Tip 9. Plan for alternative sources of funding – It is important to take into account additional financial options during a recession. Startups may be eligible for government subsidies and loans to help them weather an economic crisis.

Additionally, during a financial crisis and rising inflation, family members, friends and angel investors may be more inclined to invest in a startup.

Tip 10. Be ready to cut costs – Startups must be extremely frugal with their expenses during a recession. Unfortunately, this may force you to reduce your spending in order to survive.

Be prepared to reduce spending in any parts of your budget that are not necessary for the day-to-day functioning of your company, including your marketing budget. To cut costs, you might also need to lower employee compensation or fire staff workers.

To save money, you can consider outsourcing some of the work to a firm specializing in back office services.

In summary: be patient

It may take longer to raise money during a financial crisis than it does during a prosperous period. It is critical to exercise patience and never give up in order to meet your fundraising objectives.

If you don’t get funding right away, don’t give up. Instead, keep presenting your company to possible investors; eventually, the appropriate people will come forward wanting to fund your business.

VC firms might require extra time to decide. Due to the financial crisis, their budgets are constrained, therefore they must make sensible financial decisions. 

VC companies must make prudent portfolio company selections. Even after making a solid choice, it may occasionally be necessary to wait for the money because their cash flow may not be as liquid as in a favorable period.

Want more? Escalon provides startups and small to midsized businesses with accounting, strategic finance, CFO services, taxes and HR. Talk to an expert today.

Author

Neha De

Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.

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