Startups are facing difficult challenges in obtaining funding in the face of the current pandemic and the global economic slowdown. Although this dearth of funding mostly hurts new companies, it also has a negative effect on the wider economy.
By Gary Stevens
Established corporations often rely on partnering or funding successful startup companies as a form of research and development. With fewer startups able to receive funding and launch their companies, whole industries will notice a decrease in innovation and new developments.
Securing funding while also preparing for budget cuts is key for startups who want to survive this brutal climate. According to JPMorgan, the average small business has just 27 days of cash in reserve. It is now more important than ever for startups to understand how much they need to keep their company running and focus on gaining that funding. Startups would be well advised to anticipate that they may have to survive up to three years with extremely limited funding.
It’s not all doom and gloom, though. One huge benefit that smaller companies have is that they are leaner and can adapt more quickly to a changing environment. In this article, we will talk about how Nordic startups can secure external funding for their companies in the face of the pandemic and global recession. We’ll also discuss how smaller Nordic companies have advantages over larger, more established companies.
Family & friends
Putting your pride away and asking family and friends to invest in your company can actually be a great way to avoid the interest rates that come with loans or the lack of control that comes with bringing in an outside partner or active investor.
Since startups have been hit hard by the pandemic, turning to relatives or friends for financial assistance is often the only recourse for many entrepreneurs to stay afloat. Furthermore, your friends and family (hopefully) already believe in you and understand your mission, so their funding can have a value that is deeper and more symbolic than a check from an investor.
The drawbacks to this approach, though, is that it may put your relationships at risk. Make sure the potential risks, as well as the rewards of the investment, are made clear during your pitches to family and friends. Establishing clear boundaries from the start is essential to avoid the pitfalls that come with feeling financially beholden to people you know personally.
Venture capital investors
Once an ideal form of funding, a reported 40% of Nordic startups are reporting issues with receiving their current or planned funding round. The lack of eager VC investors has meant that many startups have had to find more creative ways of getting funding. However, it doesn’t mean those good investors aren’t out there.
Venture capitalists like to invest in companies with a track record, making it challenging for brand new businesses. However, if you can sell one on your business idea, getting funding from a venture capitalist can change the trajectory of your company. Of course, the best thing about VC is that the money does not need to be paid back. The investor enjoys the rewards of profit but also shares the risks.
Startups may have more luck requesting bridge rounds, or smaller infusions of capital with the more modest expectation of solidifying your position in the market. Bridge rounds are the funds needed to “bridge” gaps in revenue.
Another benefit that comes with partnering with a VC investor is that they can introduce you to key networks and provide you with advice that can help your company grow. The downside is that you may lose some level of control over your company’s future as you involve your VC investor in the decisions regarding your startup.
Angel investors offer their own money in exchange for the opportunity to invest in a company. Although angel investors generally have less money to offer, they are more likely to take an active interest in your company and are able to provide advice and support. Angel investors can be the ideal contact to have when you are trying to turn your business idea into a startup.
Simply going to the bank for a loan is another viable option for startups. The good news is that many Nordic banks and governments understand the importance of maintaining a good environment for startups, especially tech startups.
“We need to make sure the crisis in relation to Covid-19 does not remove the basis of existence for these companies, intended to secure growth and jobs in our society both now and in the future,” has said Klavs Hjorth, head of growth and impact at Danske Bank.
Of course, loans come with some drawbacks, mainly that they need to be paid back with interest and they require collateral upfront. Startups looking to apply for a loan need to carefully analyze the needs of their business and determine exactly what results they want to see with their new funding. Tech startups are at an advantage here, as many have experienced a surge in interest due to the increasingly digital life due to Covid-19.
Credit cards are convenient because they are easy to qualify for, accept payments online and allow you to have a greater degree of autonomy over how the credit is used.
However, you should also be careful about choosing this option for funding your startup, as most cards come with very high interest rates.
Fortunately, there are certain credit cards that come with a 0% interest rate for an initial six month period, and these will be the most ideal for external funding as they give your business time to pay them off without owing anything extra. Do intense research on credit card companies to find the best deal and fit for you.
Smaller startups have an advantage over larger corporations because they are more agile and adaptable. They also don’t have a large workforce and have less overhead costs. With so many Nordic companies leading the way in tech innovations, it’s safe to say that these industries are more insulated from the negative effects of the pandemic.
However, even Nordic startups in heavily hit industries can hope to get more funding to weather the storm. With resilience, adaptability, and some luck, well-positioned startups can still survive and thrive in this challenging landscape.