Alternative Ways Entrepreneurs Can Fund their Businesses Amid the Pandemic
Start-up funding for March 2020 dropped by over 50 per cent as compared to the previous month, reveals data from Venture Intelligence. The start-up data tracker further reported that Indian startups managed to raise only $354 million across 34 deals, down from $714 million secured in February across 46 deals. At $1.74 billion (across 126 deals), startups also saw a 22 per cent year-on-year decline in investments for the first quarter of 2020. The numbers reflect a significant slowdown in funding activities, primarily caused by a sluggish economy coupled with the ongoing nationwide lockdown.
VCs investment volume typically has declined due to the ongoing crisis and most of them are quite sceptical about making any new investments in an indecisive market condition. While they are waiting it out, entrepreneurs may need to seek alternative forms of capital. Although there are other ways of raising funds, ultimately the best one depends on the current financial situation and the exigency for sourcing funding.
While entrepreneurs seem to consider venture capital as the default capital source, it is not ideal for most businesses. To attract venture capital investors, businesses require to have high-growth potential, an enormous addressable market, and a significant amount of capital to fund that growth. If any company is a fit for VC, they need to be well-prepared and spend substantial time to find the right VC firm. While getting VC backing can typically take six months, in recessions VCs tend to invest less capital lengthening the process. And if the company is not one of the very top performing startups in the market during the crisis, there will arise the need to look elsewhere for financing.
Friends and Family
A common way of sourcing funds for a new business is to approach family or friends. Depending on reliable sources from family in setting up a new venture or raising fund for business expansion can be a trusted option that also comes with the risk of tarnishing close relationships. With the crisis digging into the market and unemployment rate increasing, however, it is likely to be a difficult time to raise fund from the immediate family.
SBA (Small Business Administration) Loans
One of the most striking options of fund raising at lower rates, SBA loans require good credit and are time-consuming. The application process is quite lengthy and can take about two to three months.
Traditional Term Loans
This is a great low-cost option for mature and profitable businesses with great credit but unfortunately most small businesses don't meet all of the necessary criteria. In addition to the high qualification standards, the terms may require personal assets to be used as collateral.
This includes a variety of financial structures to provide growth capital to revenue-generating companies without giving up any equity. These options are designed to deploy capital very quickly and offer more flexibility than traditional financing options. While the rates are higher, the availability, speed, and non-dilutive aspects can be appealing to founders.
The crisis has undoubtedly affected the start-up funding scenario in India, but it has also created new opportunities for startups that can adapt to the current environment. Some companies are already showing trend-defying growth, which is giving a ray of hope to VCs and angel investors. While it is too early to measure the long-term impact of coronavirus, entrepreneurs can expect a positive turn towards the end of the year.