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The Non-traditional Funding Models to Consider for the next Quarter

By Sudeep Srivastav
April 10, 2020 6. min read
Last update on: August 7, 2020

The stock markets around the globe have been taking several punchings and pounds. The weeks to come didn’t seem overly hopeful as well. The speculations around coronavirus outbreaks, declining oil prices, and the lowering gold prices are playing a massive role in scaring the stock markets and the investors alike on how dire would the economic impact be. 

Out of the plenty of reasons for global economic slowdown, the one that is most on the surface is the impact of coronavirus. 

The Coronavirus Impact

In March, the stock markets shared their biggest losses since the 2008 recession, hinting towards a global slowdown. Following WHO declaration of Coronavirus as a pandemic, Dow too entered the bear market territory and the analysis of coronavirus impact across industries began. It then took little to zero time for wealth managers to draw parallels between this world economic slowdown 2019 and ones created by past pandemics. 

statistics of economic slowdown during pandemics

“While some epidemics did spark a market correction — which is what we are witnessing now — their impacts tended to be relatively short lived, with drawdowns lasting less than two months. The HIV/AIDS pandemic in 1981 was the exception with 5.1 months of market impact,” Freddy Lim, the Co-founder and CIO of StashAway told CNBC Make It. 

How Are Investors Reacting To Coronavirus And The Speculations Of Recession? 

The economists and investors from around the world are predicting an economic collapse in the near term. While the discussions around how big the economic impact would be or what will be the duration of global slowdown is still happening around several video conferences, there is one thing that the investors know for sure – it is time for them to be wary of what is to come and the approach to take when the worst strikes. 

Going by the last recessions, here’s what they think will happen in the upcoming global economic recession – 

1.  Fewer Funding 

Since the past 5 years Venture Capitalism has become a hot topic with a number of seed stage fundings being opened with sub-$10 million in capital. Going by the past record, we can predict that lesser seed stage funding institutions will be willing to make investments in the new startups during the economic slowdown 2019

VC performance across years

2.  Lesser M&A

Public valuations are the first clear impact of recessions. While Dollars are still flooding in as investments into overvalued technology companies, but if you look at the stock prices of famous public technology companies, the stock rates lowered as low as 37% average. 

There are enough statistics to say that we are heading for similar M&A activity in the global slowdown 2019.

M&A performance across years 

3. Lesser IPOs

 IPOs are mainly seen as a prime indicator of the VC state – a big reason why entrepreneurs seek guide on how to have an IPO. In the last 20 years, the numbers have seen a low peak after the Dot Com crash and 2008’s Great recession. Around the same time, we also saw a decline in the value of the exists. Every time that happens, startups start operating with an increased pressure to raise money even on small funding round sizes. Something that can be expected in this world economy recession as well. 

ipo performance across years

4.  Stringent Investment Criterias

For entrepreneurs seeking investment in the next quarter, they should be prepared to cross tightened investment criterias. Investors will now expect the startups to be more efficient in the customer acquisition costs and shorten their sales cycles. It is expected that the startups which are able to showcase their cash flow maintenance prowess will have a better chance than the ones that rely heavily on marketing and promotion. 

Additionally, the early stage startups will have to prepare for realistic contingency plans to present to the investors when pitching their business. 

With everything that we just covered above, there is one thing that is clear. It will be unwise to take the traditional funding route if your plan is to raise investments this quarter. Let us look into the other different funding models options that are available to the digital-age entrepreneurs. 

The Different Types Of Business Funding Models Available To Startups For The Next Quarter

Community Development Finance Institutions 

There are various nonprofit community development finance institutions operative across multiple countries, which offer capital to microbusiness and small business owners. The difference that these hold from bank loans is the approach that they have towards credit scores. While in banks, low credit scores more often than not land people in no loan pile, in case of CDFIs, credit scores are analyzed on the unfortunate events grounds. 

Partner Financing 

In this funding model, other players in the industry fund your growth in exchange for special access to either your product or staff, distribution rights, etc. They prove to be a good alternative since the company which you partner with through this route are usually a large business or might be in the same industry having an interest in your business offering. 

Invoice Advances 

Under this new age startup funding models, the service providers lend you money on the invoices that you have billed out – ones that you can repay after the customers settle their bills. Through this, the business has the necessary cash flow which it requires to keep operating as you wait for your customers to pay outstanding invoices. Eyal Shinar, the CEO of Fundbox, a small business cash flow management company, mentioned that these advances enable businesses to narrow the pay gap which emerges because of the billed work and payments made to contractors and suppliers. 

Crowdfunding 

Crowdfunding on platforms like Indiegogo and Kickstarter help give small businesses a financial boost. They allow the businesses to create a pool of small investments coming in from different investors instead of poaching one investment source. It is deemed unwise for entrepreneurs to spend all their investment options at an early stage. With the help of crowdfunding, they can raise the required seed funds needed to get the startup off grounds. 

Marketplace Lending 

Peer-to-peer lending is a great option for raising funds. It majorly uses a platform to connect the lenders with borrowers. Prosper and Lending Club are two notable P2P lending platforms active in the USA. P2P lending carries a great deal of potential to be the finance alternative of small businesses, especially in a post-recession credit market. The problem with this funding model is that it is only available in limited states and is yet to become mainstream. 

Revenue-based Financing 

This particular is used mainly on the front of restaurantes and movies. Here, the investors get a fixed percentage of the company’s revenue till they don’t make their x amount of pre-decided money. Funds like the Lighter Capital and Fledge are two of the prime examples of this funding model. 

ICO/ IEO 

If your startup happens to be around Blockchain, it can be a great idea to take a decentralized route to fund your proof of concept or idea. The process of launching an ICO or IEO is slightly more technical than seeking funds in the non-decentralized route. 

contact our blockchain experts

What Should Be Startups Next Fund Seeking Move?

We recently wrote an article on the types of mobile apps tech investors will seek to fund in 2020, where we looked into some hot spots in the technical domain that we believed to be in the investors’ radar: Cannabis applications, Real estate apps, Fintech solutions, ERP solutions, and mHealth etc. 

But with pandemic being in its full swing and a state of recession lurking around the corner, the investment choice might see a slight change. 

The investors, as per our understanding, will be backing startups and ideas that answer to masses and answers to all the digital challenges being identified in the current lockdown scenario. 

If your application or digital solution is around the solution of challenges that social distancing poses both for businesses and individuals, there are some resources we have gathered on how to get funding for startup to aid the process and prepare you for success. 

  1. How to Raise Money for Mobile App Startups in 2020?
  2. How To Build An MVP That Raises Money For Your Mobile App?
  3. How to Get Angel Funding on Your Mobile App Prototype?
  4. An Introduction to Blockchain Funding Models Beyond ICOs

All these resources comprehensively have all the data that you need to get funding on your app idea, irrespective of the economic situation and probable slumps. Now that you have an answer to how to get funding for startup, the next step should be to create a digital solution which would get you the funding you require. 

Get in touch with a skilled mobile app development company to help your funding-friendly digital solution off-ground.

Sudeep Srivastav
Sudeep Srivastav
CEO, Appinventiv
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