Data suggests venture capital funds that actively invest during a period of economic downturn come away with higher returns than usual. Founders must ensure they have defined their timing and fundraising goals, writes Michael Buckworth.
For investors, disruption creates opportunity. The bursting of the dotcom bubble two decades ago resulted in the collapse of many businesses, but at the same time it allowed young innovators such as Amazon to grow.
Uber and Spotify, meanwhile, were born out of the 2008 recession. While primarily a tragedy, the pandemic will undoubtedly also provide chances for any start-up ready and willing to make moves now that will allow them to grow and prosper.
Capital ready to deploy
Though certain strategic investors are likely to slow down, there are multiple VCs currently sitting on a large amount of dry powder and who will be looking to invest. Given there is economic slowdown ahead, start-ups need to act now to secure funding while there is still money available.
Funds that have the capital to deploy will be seeking businesses with lower valuations, making young companies perfectly placed to position themselves for investment. Indeed, data suggests funds that actively invest during a period of economic downturn come away with higher returns than usual.
UK investors in the start-up environment have taken pains to stress that they are very much continuing to be open for business, indicating that funds will be opportunistic in the coming months.
As such, VCs will be needing long-term investment opportunities and will be ready to consider early-stage deals. However, they might focus on adaptability, with resilience and due diligence also key.
The benefit of the start-up
The UK start-up sector has enjoyed relatively large and enduring levels of investment during the reasonably steady environment of the past decade. Start-ups also provide opportunity when agility is more vital – for example, during periods of instability.
Early-stage pre-revenue technology start-ups are relatively less risky since they have no exposure to the market and no supplier risk. Investors will be interested in companies they believe will be able to withstand an economic downturn, meaning start-ups with robust mitigation plans in their go-to-market strategies will be in a good position to gain investment.
Founders must, therefore, ensure they have defined their timing and fundraising goals, and take the time to map out target investors and necessary fundraising materials, and build investor pitches.
Since investors are increasingly having to use video and call conferencing calls, this is also a great chance to reach people across the world, as well as to connect with those that may have more time on their hands while at home.
The time is ripe for development and hiring
A major challenge start-ups face is in finding and attracting top talent, especially when resources are much more limited than those of larger established businesses.
With the present economic conditions resulting in a large number of layoffs across the UK, the US and Europe, more high-quality talent is available worldwide than usual for building an effective team. Start-ups must seize this opportunity to grow while there is additionally reduced competition for hiring.
The UK Government’s generous support schemes are available to assist start-ups in gaining funding. For example, the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) have been created to encourage investment into start-ups and early growth-stage companies through offering tax incentives to investors.
Investors are able to make an equity investment of up to £100,000 per tax year under SEIS or £1,000,000 per tax year under EIS (with a higher annual limit for companies with more innovative businesses).
Most UK angel investors see SEIS and EIS as a crucial condition of their investment, and qualification for these schemes is uncomplicated.
In addition, the Government has recently announced a major increase to the grant funding for the most innovative companies, administered by Innovate UK. At the same time, the new Future Fund scheme provides support to slightly later stage start-ups seeking to raise a convertible loan with matched funding provided by the Government.
Start-ups must be focused and strategic when looking to raise capital. Tech start-ups that are agile and innovative are in a great position to flourish, particularly those who can demonstrate sustainability and an ability to withstand an economic downturn.
People are looking for long-term success and businesses that can help to build back better will ultimately win favour with investors.
Michael Buckworth is CEO and managing director at Buckworths.
The views and opinions expressed in this Viewpoint article are solely those of the author(s) and does not reflect the views and opinions of Fintech Bulletin.