Coronavirus: getting investment during a pandemic - comment
This is likely to be the biggest threat to their survival that many businesses have ever faced. A ten-year period of strong economic growth has ended abruptly, and companies are having to consider far-reaching changes. However, companies do have a way to make it through this crisis: rapid, thoughtful action and scenario-planning.
The Scottish Business Resilience Centre (SBRC) is hosting a series of free webinars to help organisations do exactly that. Each webinar focuses on a different topic that Scottish businesses need to understand to ensure they survive the pandemic and come back stronger, ranging from understanding the financial support measures available to offering guidance on legal implications of this period for businesses.
Earlier this week, the SBRC looked at the venture capital (VC) perspective on Covid-19.
Many young businesses that relied, in some cases too much, on external investment to help grow their business have watched in recent weeks as their expectations shifted or even reversed. These companies are now trying to find a way through the biggest existential threat they have ever faced.
It is crucial that these organisations understand the impact of the pandemic on the funding climate. Investors are having to allocate more of their funding capacity to their existing investments and will have less available to make new investments.
Compounding this is the fact that most institutional investors probably sit on up to 12 boards, all of which are demanding more of their time at the moment so they have limited time to look at new deals.
Investors are also influenced by the source of the funds they invest, and some may have less in total to invest at the moment. Publicly backed funds are likely to be the most resilient at this time, as they will be getting continued support and encouragement from Scottish Government to support early-stage businesses.
Those organisations lucky enough to find investors may have to make do with less money than expected, and potentially be prepared to give up more equity: a recent poll of 400 venture capitalists indicated nearly 70 per cent of VCs plan to deploy less capital in 2020 than in previous years and there is a widespread view that valuations will be lower, reflecting the falls in public stock markets.
Investors are likely to be more cautious given potential losses they’re seeing in other sectors and the bar for investment will be higher. As a result, cutting costs and preserving runway are more important than ever.
“Before,” strong revenue growth was the most important thing that made a potential investment attractive. In the current situation, growth of any sort will be harder to deliver and being lean, adaptable, and built for survival is more important. As a business owner, investors want to see you are confident and taking control of your business’ future by decreasing costs as needed.
Options such as temporary pay cuts or participating in the government’s furlough scheme may be necessary to ensure your business can survive and stay in existence to support staff and customers for the medium to long term. This will be tough. If your changes don’t feel painful, you’re probably not doing enough.
Another radical option may be to change the focus of your business if, given the economic climate, it cannot continue as it has been. Hope is not a strategy and fear is not an option. For example, if your customers are in the hospitality industry and you sell into their locations, consider pivoting to help them develop a takeaway or delivery service instead.
Messaging may have to change significantly as well. A year ago, propositions to increase revenue were about twice as effective as cost-saving propositions. That has completely reversed, with “save you money” messages being around three times more effective now. Creative thinking and the ability to act rapidly will demonstrate to potential investors your ability to overcome unforeseen challenges.
The Covid-19 pandemic is changing the way we all do business. However, as Jude McCorry, chief executive of SBRC, noted: “The Scottish business community is both resilient and strong, but this is a very trying time. Our webinars bring advice and guidance to companies who aren’t sure how to navigate this new world and are challenged by the difficult situations they now face. By coming together, we aim to ensure every business has a fighting chance. Now, more than ever, we must unite across industries to keep the Scottish business community alive.”
Warren Buffett famously said, “rule number one: never lose money. Rule number two: never forget rule number one.” In today’s economy, the first rule should instead be “don’t go out of business”. Showing that you can adapt to survive this pandemic is key to raising capital and coming out the other side.
By Alistair Forbes, technology entrepreneur and angel investor
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