Impact Of COVID-19 On Startup Funding: How To Raise Capital During a Crisis?

The answer lies in three 'R'-research, reassess and restructure

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The COVID-19 pandemic will have a far-reaching and long-lasting impact on the global economy. Even though lockdown restricts have now been eased in several countries, financial markets are likely to take a long time to recover from the coronavirus-triggered crisis.


As reported by the International Monetary Fund, this is the worst economic downturn since the Great Depression, projecting a humongous loss worth $9 trillion in global gross domestic product over the next two years.

These are challenging times for businesses, even more so for startups that operate with razor-thin margins. Besides dealing with weak demand, rapidly changing consumption patterns and revenue losses, the startup ecosystem is facing the challenge of raising capital. With investors becoming wary of the pandemic's economic implications, there has been a significant decline in funding activities.

Not just local VCs and PEs, but many deep-pocketed global investors have also put off new investment deals until the current situation subsides. In this gloomy scenario, a pertinent question then arises—How can startups raise funds during a crisis? The answer lies in three "R'—research, reassess and restructure.


The startup funding space may not be as active as it was around this time last year, but VCs are still seeking investment opportunities that can help them grow their wealth. Find out which investors are most likely to invest in the sector your startup operates in, and then shortlist their names. Look into their recent investments to gather critical information such as the average deal size, funding round (whether they usually invest in seed-stage startups or large-stage startups), and how involved they are with their investee companies.

The research will give you a clear perspective to zero down on the prospective investors that are best suited to financially support your venture. Once you know the ins-and-outs of the industry, you can also have an edge over your competitors who might be eyeing the same capital.


Once your research is complete, reassess the viability of your business model in the current environment. Is it still profitable? Is it scalable? Can it promise sustainable and equitable growth in the long run? If not, then you probably need to make some changes to ensure there is an actual demand for the products/services offered by your company.

The pandemic has brought a tectonic shift in consumer mindset, which in turn is impacting their buying behaviour and spending habits. For example, customers are likely to become more price-sensitive going forward and prefer businesses that can provide the best value-for-money. Taking into account these external factors, you will have to take the next course of action.


The final step is to restructure your messaging to the investors. Since investors tend to back up businesses with a strong USP, you have to ensure that the pitch deck reflects the same. Be it in terms of product innovation or the problem you are trying to address, your startup should be able to stand apart from the crowd in front of the investors. When it comes to valuations, be open to negotiations.

Against the current background of economic uncertainty, starting with extremely high valuations can irk the investors. Instead, set realistic, achievable valuations to not only gain their trust, but also mitigate the dilution risk. Maintaining transparency is the key to draw investors, especially during crises.

Raising funds appear to be an arduous and time-consuming process right now, but the situation is slowly improving. Investors have gotten over the initial shock and are now ready to loosen their purse strings again. In the first quarter of 2020, finTech startups in India managed to surpass China by raising $421 million (across 29 deals), almost twice the amount Chinese finTechs managed to secure. Overall, VC/PE investments also saw a surge in May after a slump in the previous month.

These developments suggest that the startup investment space is already on its way to recovery, and it is likely that we will see more investments happening in the third and fourth quarters of this year.