How is the economic downturn affecting early-stage investment?

As an Access to Finance specialist, I’ve seen the concerns affecting businesses.

Many founders are unsettled by how inflationary pressures, an understanding that the postpandemic economic recovery will be slower than hoped, and the current ‘bear’ stock market will directly impact their fundraising and the earlystage investment market.

My response is both reassuring and cautionary.

The reassurance

  • The early-stage equity investment market is very liquid, and the supply of capital is not a constraint. Some commentators believe Q1 2022 investment levels are up by 50 per cent on 2021 levels.
  • When global stock markets fall, the flow of capital to early-stage entities increases.
  • Business angel networks are still very active, and the capital is still attracted to HMRC incentives (SEIS / EIS) and syndication to reduce risk is buoyant.
  • Access to Finance is seeing increasing interest in pre-seed and seed-stage ventures as venture capital reaches deeper into the eco-system.

The cautionary

  • Investors are increasingly focused on time to profitability over growth.
  • Founders should expect an increased focus on due diligence processes.
  • Expectations on cash ‘runways’ are extending, and we now see 18m+ as opposed to 12m.
  • Valuation inflation is over, and valuations are being reduced to pre-pandemic levels.
  • Investors expect a reduction in the frequency of funding rounds, impacting the cash runway.
  • Future capital raising in the venture capital space may prove difficult as markets improve.

The message to founders is clear: planning, preparation and identifying appropriate support are critical in developing and positioning fundraising strategies.

Lancashire-based founders are fortunate to be able to access support through the Access to Finance service, Boost and University of Central Lancashire Equity Investment Readiness Programme.