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Preserving capital during crisis: A primer for tech startups

Apr 16, 2020

Trying to fund a tech start-up is challenge enough. Enduring an unexpected crisis — be it personal, economic, global or otherwise — in the midst of the start-up process is a completely different level of stress.

Yet not all is bleak for tech start-ups. Many brick-and-mortar firms, hotels and entertainment venues are facing a long road to recovery. However, tech start-ups, especially those in healthcare or FinTech, could be poised for a rush of investor interest once the impact of the COVID-19 pandemic begins to wane.

Still, no one knows how far away that moment might be. And when it arrives, cash-starved start-ups might be challenged not to give away too much of their business when money finally re-enters the market. To ride out the current uncertainty, focus on shaving costs and keeping a firm grip on your capital.

For tech start-ups, then, here are four tips for preserving capital and weathering the current storm.

1. Cut costs in the absence of start-up funding

With investors likely to be glued to the sidelines for the next three to six months, tech start-ups need to trim costs and revise budgets to ensure they can stretch their cash until the end of the year.

For early stage start-ups with seed capital already stashed away, it may be business as usual. Companies with lean budgets, remote teams and low overheads may be able to push ahead with developing their products. It’s the growth stage companies — looking for fresh funding rounds to boost sales and take their products to the next level — that are likely to be affected.

Corporate travel budgets have already disappeared, so cutting back on costs such as direct marketing and sales offensives can help save money. And if COVID-19 shutdowns mean client meetings are out of the question, creating new processes to promote products to clients through video presentations may help boost revenues in the future.

2. Start-up loans and fresh financing

One of the biggest start-up challenges, especially for the cash-strapped, is finding fresh sources of financing to see them through.

Until now, start-up loans from traditional banks were usually out of reach as funding for start-ups in tech with few assets or profit to demonstrate to lenders. Through the $2 trillion government bailout package to help companies hit by COVID-19, tech start-ups can now apply for Small Business Administration Paycheck Protection Program loans to help pay staff and cover their operational costs.

Many private equity and venture capital-owned companies that were previously excluded from the PPP due to the “affiliation rules,” which stated that, due to common ownership across companies, the employees in those businesses collectively put the companies over the 500-employee limit set for the PPP, are now eligible for the new $600 billion Main Street Lending Program that will provide relief for individual investors, and private equity and venture capital firms hurt by the COVID-19 pandemic. The Main Street Lending Program will offer loans to COVID-19 affected companies with employees less than 10,000 or less than $2.5 billion in revenue.

In addition, angel investors may still be looking to take strategic stakes in growth stage companies. Early stage start-ups could also turn to creative crowdfunding initiatives or even tap family and friends for cash, for a thin slice of the company in return.

3. Start-up funding waiting in the wings

Global equity markets might be in the doldrums, but private capital is flush with cash after nearly $900 billion was raised by over 1,000 funds last year.

As a buyer’s market beckons, private equity and venture capital investors are analyzing opportunities as they wait for the crisis to ease before swooping in on attractive companies. Lower valuations after the stock market rout will be a major draw for investors as they look to put money into tech start-ups promising growth.

4. Focus on FinTech and healthcare start-ups

Start-ups developing innovative healthcare or FinTech solutions to problems arising as a result of the pandemic are among those likely to see the most interest from private capital. Companies in the telemedicine space — such as those offering virtual appointments with doctors who can access health records and prescribe drugs — could benefit.

Online financial systems that allow small and medium businesses to receive payments are also likely to attract investor interest, as the pandemic is highlighting the payment problems companies face during shutdowns.

How Wipfli can help

Despite a gloomy economic outlook, the future remains bright for start-ups creating dynamic products and solutions, as long as they can overcome start-up challenges, cut costs and hold on tight to their capital until the crisis passes. We continue to follow developments related to specific funding programs that impact PE and VC funded companies, as they continue to evolve and what is available currently will likely change. Need more insight? Contact us.

Author(s)

Terry Ammons
Terry Ammons, CPA, CISA, CTPRP
Partner
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Michael Vaccarella
Michael L. Vaccarella, CPA, CGMA, CM&AA
Partner – Private Equity and Transaction Advisory Services
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