Raising capital for your business, whatever the economic conditions, requires a high level of organisation, pre-work and focus. But throw into the mix an economic downturn, and the conditions can become less predictable for both companies and investors.
An economic downturn typically affects investor risk appetite, but that isn’t to say that it’s impossible to seek public or private funding. We have seen many companies successfully raise funds during less-than-ideal conditions. Recent examples are PurePods, which raised over $4.5m in 2022 and First Table, which raised over $3.7m in early 2023. Compared to previous years, both of these raises took place during tough economic capital-raising conditions.
Advantages of raising capital during a downturn
One advantage of raising capital during an economic downturn is that your business won’t be competing for investors' attention with other companies.
Companies in the consumer goods space can especially benefit from raising funds during a downturn as their brand retains market visibility and value and is more likely to be seen as an ‘essential item’ by consumers.
Challenges of raising capital during a downturn
Investors' appetite is the main factor that holds some companies back from launching their capital raise during a downturn. A turbulent market means that some smaller investors may be more hesitant to invest large sums of money, preferring to retain cash; however, this is not the case across the board.
Importance of timing and forecasting
If a company decides to pause their capital raise plans until market conditions improve, it runs the risk of stunting its long-term growth. While we encourage businesses to be mindful of economic shifts, they also need to be proactive and not wait too long to raise growth funds.
How to raise capital during an economic downturn
Companies need to be flexible and adapt to investor expectations when raising funds during a downturn or recession.
- 1. Preparation is key
Your business’s operational costs and financial forecasts will be under the microscope by potential investors. Spend the time to ensure your due diligence data room is in order and financials and Information Memorandum are thorough but easy to understand and capture investors' imagination. - 2. Work on your pitch
Having a compelling investor pitch is more important than ever. Focus on the business’s strengths and growth trajectory, but make sure you have answers for the hard questions that you’ll likely receive from investors about how the downturn or recessions will affect your business sales. - 3. Cast a wide investor net
Raising capital during a downturn is possible; it just may require more work. Improve your results by talking to a large audience of investors via a private equity firm like Snowball Effect or venture capital firms. Here at Snowball Effect, we have an active database of over 50,000 high-net-worth, family office, fund and retail investors. - 4. Don’t get fixated on valuation
A common mistake we see companies who are raising capital make is becoming too fixated on the valuation of their business. Value your business too high, and you risk setting the bar too high in terms of investor expectations; value it too low, and it may detract investors.
Are you interested in learning more about raising capital for your business? Our team is happy to answer any questions and can be contacted at [email protected] or by calling 0800 SNOWBALL.
