How the Pandemic Affected Ways of Raising Capitalby
Despite the challenges of the COVID-19 pandemic, many businesses continue to succesfully raise money by eschewing traditional methods. In this article, Billie Ann Grigg breaks down the traditional ways, from angel investors to PPP funding, and explains why nontraditional strategies have taken hold during the pandemic.
Raising capital for a business isn’t easy in the best of times. Add in a pandemic, and you have… An exciting and innovative atmosphere for raising capital for a small business?
It seems counterintuitive, and it hasn’t been true across all industries, but a number of businesses have been able to successfully raise capital over the past couple of years. Although traditional funding options have been slightly more limited, alternative funding options have proven to be very favorable toward small businesses during the pandemic.
Here’s what you need to know about what has happened so far and what could happen in the coming months and years.
Raising capital the traditional way
Traditionally, a business owner will raise capital using one or more of the following methods:
- Angel investors and venture capital
- Small business loans and government grants
- Personal financing
How have these traditional methods been impacted by the pandemic?
Angel investors and venture capitalists
Angel investors and venture capitalists have been cautious during the pandemic. These funding sources are typically high net-worth individuals – or organizations or funds made up of high net-worth individuals – who depend on the economy behaving in a somewhat predictable manner. Although the economy is never 100 percent predictable, lockdowns and shifts in consumer behavior have introduced an abnormal amount of instability. This, in turn, has caused angel investors and venture capitalists to be a bit more hesitant to risk part of their wealth on business capital investments.
Businesses that offer a solution to a problem caused by the pandemic are the exception to this rule. Angel investors and venture capitalists have behaved favorably toward technology companies that enable business to continue even in the wake of lockdowns and social distancing.
Small business loans and government grants
Businesses already in existence at the start of the pandemic got some relief in the form of PPP loans and the EIDL program. These programs were not intended to fund business growth, but for many businesses that were able to maintain revenues at or near pre-pandemic levels, they did just that. This was an unexpected way many business owners were able to raise capital with much less effort on their part than the normal loan and grant application process.
Funding for businesses not eligible for either of these programs hasn’t been significantly impacted by the pandemic, with the exception of some banks experiencing a slowdown in processing loan applications. With a national focus on rebuilding the economy in the wake of the pandemic, securing capital through a small business loan or government grant might become easier in the coming year.
Thanks to a combination of stimulus checks and an inability to spend money on their usual activities, many taxpayers found themselves with increased savings during the pandemic and extra time to spin hobbies into businesses. “Pandemic entrepreneurs” started more than 4.4 million new businesses in 2020, and increased savings helped many of them do so without incurring debt.
We should keep in mind, though, that this was true only for individuals who were already in a relatively sound economic position. Individuals in economically marginalized communities didn’t enjoy the same level of opportunity.
Raising capital the non-traditional way
Although traditional means of raising capital – especially from angel investors and venture capitalists – have been limited during the pandemic, non-traditional funding has become increasingly popular. The sense of “we’re all in this together” combined with more than a touch of boredom has helped fuel these non-traditional means of raising capital.
During the pandemic, crowdfunding shifted from being only for startups to helping existing businesses stay afloat. Businesses that were closed during lockdowns were able to reach out to their customer bases to raise funds to reopen quickly and safely amid new restrictions and guidelines. Now that more business owners are familiar with crowdfunding, they will likely continue to use this method to raise capital even as we put the pandemic behind us.
Product pre-sales have long been a part of the capital-raising landscape. Not every person who had access to additional discretionary income chose to start a new business, but many needed something to look forward to. Product pre-sales helped many business owners keep their businesses afloat – and growing – even as sales through traditional channels were flat or down. Business owners also taught their customers to anticipate and enjoy pre-sales, making this a method that will remain viable in the coming years.
In the absence of our normal activities, many of us got bored during the pandemic. Savvy business owners leveraged the power of fun – in the form of contests – to not only alleviate boredom but also to raise capital for their businesses. As an added bonus, contests can be leveraged to build a feeling of community among customers, which can in turn be leveraged to build a stronger customer base going forward.
Let’s not put too fine a point on it: The past two years have been hard. Even though access to capital has still been (largely) accessible, and even though “pandemic entrepreneurs” have opened millions of new businesses, millions of existing businesses have still closed. We’ve also been riding a wave of optimism, believing things “have to get better soon.”
Some reports predict personal savings will take a hit in 2022. As we put the pandemic behind us and resume our normal activities, some of the things that kept businesses alive – like participation in crowdfunding, product pre-sales and contests – might not be as attractive as they were when we had nothing else to do.
There is also concern about inflation, and history shows high inflation usually leads to reduced access to traditional funding like loans and grants.
As we put the pandemic behind us, it’s important to make sure business owners know all of the options – traditional and non-traditional – available to them for raising capital. A continued focus on building relationships, both with their customer base and with potential investors, will serve business owners well in the coming months and years.
Billie Anne Grigg will be speaking at AccountingWEB Live Summit this May. She has been a bookkeeper since before the turn of the century (this one, despite what her children think). She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, and a Mastery Level Certified...