Rich Ashton, Business Development Manager at Braavo, shares his perspective on mobile funding and financing during and after COVID-19.
How should first-time app founders think about mobile funding?
It will be very challenging for first-time founders in most sectors to raise equity investment in the next 12-18 months. Investors will be focused on shoring up their existing portfolios and are less likely to be looking at new opportunities in an increasingly uncertain and risky market.
If you are currently speaking with VCs, do as much due diligence as you can. How long has the fund been active? Do the investors running it have previous experience managing a fund through a downturn? Do they have a reputation for sticking with their commitments – or for walking away from deals? More experienced investors will have learned valuable lessons from the dot.com crash, 9/11, and the 2008 global financial crisis. They will bring a lot more to the table than just capital, and can help you overcome unforeseen challenges that lie ahead.
Focus on maintaining and strengthening your existing network of investors. Video conferencing enables us to stay in touch with one another, but it is much harder to build new relationships from scratch, without the benefit of meeting in-person.
If you need an injection of capital to keep your business going, take what you can get and move on. Don’t be surprised if the pendulum has swung in favor of the finance provider. Valuations and terms will be less attractive than earlier in the year or in years prior. Naturally, you will want to negotiate the best deal you can, but as we stand on the precipice of a deep recession, it will pay to act fast and avoid complex drawn-out negotiations.
Flexibility is crucial. No one knows what the world will look like 3 months from now, let alone 12 or 24. Be wary of agreeing to long-term commitments. If there is a trade off between price and flexibility, I would urge founders to opt for the more flexible option given the current climate.
Governments are making grants and loans available to support businesses. However, eligibility criteria and delays in actually disbursing these funds could mean that meaningful and timely injections of capital from the government are limited.
What are the alternative mobile funding options that make sense for new app founders? Why does this matter?
As equity investors’ capital is reallocated to less risky asset classes, and credit markets tighten, founders should be aware of all the mobile funding options available to them.
There are a plethora of fintech lenders on the market today, but tread carefully. Very few of these businesses were around during the 2008 recession and have not yet experienced a major downturn. Inevitably, default rates will increase over the coming months, so it is crucial that you conduct proper due diligence on their track record, management experience, and access to capital. Solid companies are more likely to be transparent with their results, as it will become a competitive advantage during this time. Fledgling lenders and those with a less robust performance history will be less keen to divulge detailed figures, and this should sound alarm bells.
Factoring your accounts receivables is a pragmatic option for many companies, particularly if long payment terms from your customers creates a working capital challenge. For more information on the key things to consider, see our blog post here.
Advancing government tax credits may also provide a useful working capital boost, although this is often more costly than factoring outstanding invoices / accrued revenues, due to additional third-party costs involved.
Should mobile app developers be worried about banks and getting loans?
High street banks typically offer the lowest cost of capital, but there is a very good reason for that: they are extremely risk averse. Credit limits are typically small and the terms can be onerous. Security requirements are likely to be burdensome and the due diligence process can be very time-consuming.
Given the current economic climate, I would think long and hard before offering your house and personal assets to the bank as collateral for a business loan. That is a decision that could have an impact on your family for generations to come.
How has VC changed post-COVID?
The impact on VCs will vary by sector and geography, but outside of medtech, edtech, and gaming, I am not hearing a lot of short-term optimism. 2020 was set to eclipse a record-breaking 2019, but that all changed by early March.
There is a waterfall effect which starts with institutional investors and ends with founders being less incentivized to start companies and take big risks.
Institutional investors will become increasingly conservative the worse the economic situation becomes. This means that less money will be allocated to the venture asset class as they look to rebalance the distribution of their portfolio towards less risky options. This in turn means that new investments will slow down and VCs will be forced to keep more capital in reserve to support their portfolio.
This will make it much harder to raise a Series A. Without a healthy Series A environment, seed investors may be less willing to invest in early-stage businesses because they know that a follow on investment is less likely.
Raising a seed round may also become harder. Angels may be a viable option, but the mindset may have to shift from relentless growth, to a more sustainable approach that targets profitability much earlier in the company’s life cycle.
For the most part, VCs are likely to reserve more capital for follow-on rounds for their existing portfolio than before, to make sure that they have enough runway to weather the storm.
How will mobile funding impact more experienced app founders?
More experienced founders should have an easier time raising funds for a new venture than their first-time counterparts, as VCs will be looking for experienced teams with a strong track record. Now, more than ever, existing relationships will be key.
Founders who had been planning to exit their business may have to rethink their strategy.
IPOs will be delayed and the ones that do go ahead will probably float at a significant discount to the figure they may have anticipated.
M&A deals will likely suffer in a similar manner as potential acquirers wait for the dust to settle before placing their bids.
Therefore, more mature businesses that are in their growth phase may need to take an additional equity round to get them through the current climate, before they can proceed to exit.
Now more than ever, access to working capital is crucial for mobile app businesses and games. Traditional sources of funding may have pulled back, but we have not.
We’re here to help. If you’re a mobile app or gaming business looking for financing, you can learn more about our financing products here.