CAndace Nelson, a pastry chef and former investment banker, is the co-founder of the Sprinkles cupcake bakery chain. She is also co-founder of CN2 Ventures, which invests in and initiates new business ventures.
After a decade of easy money with low interest rates and plenty of market liquidity, startup founders and small business owners in need of capital are facing a new reality: their funding options are becoming increasingly limited.
Investors, banks and consumers are tightening their wallets in the face of the stock market crash and the highest inflation rate in 40 years. It can be difficult for some to accept the completely different environment in which we now operate.
Why is it so much harder to get capital for your business these days?
Well, interest rates are going up, which means the cost of borrowing is getting higher and higher. It also means investors have less appetite for risky startups because they can get a guaranteed return on safer investments.
Second, stocks have fallen and a correction in public market valuations is eventually seeping through to private markets. As a result, venture capital funds and other investors will be choosier about where they invest their dollars, meaning companies will need stronger financial metrics than they did last year to achieve the same valuation.
Third, consumer spending is falling. That could weigh on corporate earnings in the not too distant future and lead to a general downturn in the economy and the dreaded boom recession. Lenders are much tighter on their money during recessions.
So what can founders and small business owners do to prepare?
Reconsider your goals. If you need money to grow, you should refrain from growing in the short term to avoid having to raise money in this environment. A friend of hers, a consumer goods founder, raced toward her Series A earlier this year, but is now slowing the company’s growth to expand her runway. This is not synonymous with failure; Rather, it demonstrates adaptability in a rapidly changing environment.
Get back to basics. Over the past decade, venture capital has been channeled into startups that expected revenue growth and market share, and feared profitability in the distant future. Well, the future is here. As an angel investor privy to regular pitches from startup founders, I can attest that the buzzword of the day is profitability. So what can you take back that doesn’t directly impact your product or consumer experience? Can you team up with other companies to share employees or even trade services or products? Being a small business owner myself, there is no more vanity or ego projects. Gone are the vintage Italian faucets in my restaurant – the fakes will work just fine.
Identify your recession-proof product. The “lipstick effect” is a term coined by Leonard Lauder in 2001 when he observed that lipstick sales tended to be inversely correlated with economic health. The idea is that when times are tough, many consumers can find the money for small indulgences, even if they refrain from buying larger, more expensive items. Is there a “lipstick” in your range? If not, can you offer a smaller piece of your brand? Is your brand strong enough for customers on smaller budgets to make room for it?
Check between the couch cushions. Although market conditions have changed, there is still money that has yet to be wagered. In 2021, the federal government approved and re-funded the State Small Business Credit Initiative, which provides states with a total of $10 billion for programs that provide venture capital or encourage private lenders to lend to small businesses. There is also a treasure trove of scholarships if you take some time to search. I came across the Fearless Fund’s Woman of Color grant, which I referred to a baker I mentor. In the end, she won the $20,000 grant, which she uses to build her very first production room of her own.
Venture still bets money and continues to accumulate rounds, even if those rounds are smaller and take longer. A VC friend who was in the process of raising her second fund shared with me that with all the high-frequency trading and computerization in the public markets these days, she believes that private equity investing is indeed the right thing to do the safest a place to be Now there is perspective!
Write to Ms. Nelson at email@example.com.
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