This is How Much Harder it is to Raise Capital During a Downturn

Bottom Line: Based on an analysis of venture capital funding during the Great Recession, there is a high chance that startups are in for a difficult economic period as they contend with the coronavirus. Capital will be harder to raise, and many startups will raise at a lower valuation than before this crisis. Startups that have not hit profitability should curb spending, focus on revenue-generating products, and think very carefully about new hires.

The recent coronavirus outbreak has shocked markets around the world and U.S. equities, in particular, have dragged into bearish territory faster than any other tumble. This economic pullback will likely also be extended to venture capital and startups. 

Examining the Great Recession offers some historical parallels to judge the potential impact. Across all rounds types (Seed – Series D) during the Great Recession, median round sizes went down. Founders across the board were raising lower amounts of capital, and in some cases over 30% less. And with the exception of the seed round, fewer rounds were happening in 2009.

In addition, in 2009 there was a dramatic increase in the median percent equity sold per round, meaning that not only were startups raising less capital but they were also selling a higher percentage of their company for that capital than before the 2008 crash.

However, it's possible that this economic crisis may not be like the last. Pandemic infused uncertainty, consumer demand and perception shifts, low-interest rates, and increased globalization of systems will all play a role in determining how and when a recovery will happen. 

In addition, just because there is an economic downturn does not mean that entrepreneurship will halt. During the Great Recession, some of the most iconic companies in the past decade were launched. Uber, Airbnb, Slack, Pinterest, WhatsApp, and Square are just a handful of those forged during that difficult economic period.

Some of the most innovative companies of the next decade will undoubtedly be launched in this pressure cooker of change. This environment presents a unique and pressing opportunity for founders and investors to partner in building the economy of the future. 

Read the full study HERE.