One of the tough realities of economic uncertainty is the impact on capital markets. Startups are increasingly finding that raising capital is tricky at the moment. They are having to shift their strategy away from relying on funding rounds to raise capital because it is becoming more and more difficult to get investors to invest.
That means coming up with a plan B to grow your business, extend your runway and remain resilient amid the uncertainty.
There are few reasons why raising capital is so hard at the moment:
Uncertainty is spooking investors
There are many things going on in Australia and around the world which are creating economic uncertainty. With the inflation rate at its highest level since 2021, rising to 6.1% over the 12 months to June 2022, the costs of doing business are up and consumer spending is down. This, along with the war in Ukraine, the risk that Australia will go into a recession in 2023 and high interest rates are creating a more uncertain environment which is spooking investors.
This is problematic, as when conditions are uncertain, investors may hold off on riskier investments where the payoff is less certain like investing in startups.
Interest rates are on the rise
With interest rates on the rise, borrowing money is becoming much more costly. Banks are also tightening lending, making it harder for investors to access funds.
Because of these challenges and rising costs, many investors will be looking for safer investments to maximise cash flow. Investors may be looking to invest in something more stable, such as property or blue-chip shares. This is in line with fears about slow-growing or crashing startups, limiting investor returns. This causes investors to think more carefully about where to put capital, to ensure a return.
Consumer spending is on the decline
High inflation has increased the costs of essential goods including groceries and petrol, putting downward pressure on consumer spending. Nearly 45% of consumers who have decreased their spending have mentioned that inflation is a key factor. Declines in consumer spending may lead to a gradual retraction of the economy and thus, a much-dreaded recession.
Due to a decline in consumer spending, the earnings forecasts of companies on the share market will also decline, which will result in their share price declining, which will have broader impacts on the share market. This brings further economic uncertainty, which scares investors away from riskier investments.
With a potential recession on the horizon and lots of uncertainty surrounding us, investors and lenders tend to hold onto their money much tighter, making raising capital more tricky for startups.
Higher barriers to entry
For those startups that have been able to attract funding in the current environment, they have needed to prove they are profitable, have strong financial governance and are financially prudent. These companies need to continuously demonstrate to investors that they are self-sufficient, and are not overly reliant on raising capital.
In the past, startups could just tell investors their forecasted earnings, and this would generate enough interest from investors to raise capital. However, with all this uncertainty, investors are less likely to invest capital into a business which isn’t already profitable.
This shows that the standards by which companies are assessed for investment are higher, making raising capital more tricky for startups at the moment.
Need help securing capital or extending your runway? Keeping Company has worked with hundreds of high-growth startups to manage costs, make their cash go further and raise capital. Contact us today.
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The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.