Sorry, the bank is closing early – Does a recession mean the end of startup funding?

One of the first casualties of a recession is often the support start-ups need to get off the ground and fly. Certainly, there is going to be more resistance around lending in a difficult economy, but does that mean the doors are closed?

The funding problem

It's one of the strange ironies of life that just when the boost to the economy gained by encouraging entrepreneurial enterprise and innovative businesses is really needed, the funding that requires apparently dries up. Well, OK, perhaps not exactly dries up as such, but certainly, it becomes harder to obtain. For start-ups in need of funding, a slow economy, or one on the brink of a recession, could be bad news. Looking to the past, however, there are some lessons to be learned and with a little adjustment, a good start-up should still be able to find the money needed to get things off the ground.

A good place to begin for a start-up looking to fund a new venture is to review the expected chronology for the launch. Extending the runway period is a sensible option in a tight economy. Securing funding may well still be possible, but lenders will be more cautious, and caution slows progress. The desire to run ahead with the grand plan is understandable, but with less adventurous lenders in the pool, that may need tempering. More haste, less speed could well be the order of the day.

Widening the pool of lenders is another option open to start-ups. While the more traditional lenders such as banks may become overly cautious, sources such as crowdfunding, angels, private investment, and so on may well be more flexible. There is a lot to be said for raising funds from relatives, friends and contacts as well. When lending is friendlier, it's certainly easier to work with fewer finding sources, but in a potentially recessive economic outlook, that may not be a luxury start-ups have.

That said, it's also very important to resist the temptation to jump at lending options. The bottom line is still that you need to be funded in a way that works for your potential and future growth. This is very much tied up with the initial point about extending your runway if needed. An acceptable delay to your launch map while you find reasonable deals on your start-up capital is infinitely better than saddling your fledgling enterprise with a crushing debt. Alternatively, of course, you can look to lower returns and a longer period until you achieve a level of operational financial success. Either way, a dash to the launch pad may be a bad idea if it means compromising your financial goals too much.

Your business plan and product or service offer are still going to be at the heart of things. The idea, the concept, the development potential, and your grand plan are still going to be there, but in less encouraging economies, they may need a little tweaking. Weaker opportunities will clearly be weeded out more readily if there is less lending around. It stands to reason, then, that you should re-visit your proposition and make sure that you are on point when it comes to the potential gains for investors.

The economic situation is a reality that you need to account for when approaching any potential source of funding. The truth is that right now, things are unstable, to say the least. Investors are going to want to see that either reflected in the numbers or be satisfied that it isn't a barrier for you. Realistic projections, a good understanding of the potential for increases in the cost of manufacturing, accepting the impact of continued economic red flags such as the war in Ukraine, inflation and possible Brexit issues, etc., will all stand you in good stead. Realistic, considered numbers will still stand up, no matter what the economy is doing.

When it comes to launching a business in or just before a recession, there are certainly a number of names you can throw around to justify that it can work. Google, Facebook and Electronic Arts all began during or just before difficult economic periods, and, let's face it, they did pretty well. However, there is a danger of falling into the survivor bias trap.

Exceptional businesses often result from exceptional circumstances. When looking at the lessons of the past, it's just as important to look at what didn't work as much as what did.

Timing and, quite often, a significant amount of good luck are usually a factor in success, so placing too much stock in the stories of giants may not be too helpful. There is a great analogy I heard once about a team trying to figure out the reasons some planes survived raids in WWII, and others didn't. They had little success until they stopped studying the lucky survivors who came back and worked on reasons why others didn't.

Historically speaking, recessions are navigable, and start-ups do happen and then thrive. They just need to be more agile, more focused on the now and prepared to accept the reality of the situation. Lenders are still there; they just need a little more encouragement when the financial waters are choppy.