For a small business, twenty-one days may be as long as it takes to close its doors forever. But investors might just have the tools to make sure that doesn’t happen.\ _______________________________________________________________________________________________________________________
By Natasha Dinham
The world has changed faster than we thought possible. In just a matter of weeks, we’ve gone from distantly hearing the term ‘COVID-19’ to total country lockdown. For the economy, it’s deeply concerning. For small businesses, it’s catastrophic.
Large corporates may have deep enough pockets to survive plunges in demand, but many small businesses don’t have the luxury of accrued savings that will tide them over for the next twenty-one days or more. For most business owners, their business is their only livelihood. For many, it’s supporting staff who have nowhere else to turn for work. If these businesses crumble, so too do households, families, and communities.
Government has taken bold and admirable steps in providing financial support for small companies, but with lockdown looming, we’ll need all hands on deck to ensure that small businesses make it through.
There is hope. Investors in these businesses can, and should, ensure that they don’t have to weather the storm alone. By embracing innovative, out of the box thinking, funders can safeguard against the worst of the lockdown and ready their investees for its after-effects.
At the Bertha Centre, we’ve put together a toolbox of tips that investors can use during this crisis.
For equity funders, keeping timelines as regular as possible is going to be key to supporting businesses. Maintaining Investment Committee meetings and due diligence schedules – wherever realistically workable under the circumstances – will see to it that pipeline companies don’t lose out on investments at this critical moment. If ever there was a time to embrace technology and pilot a virtual due diligence process, this is it.
For investors willing to embrace innovation, revenue-based loans are a powerful antidote in times of crisis. Revenue-based deals are typically structured as loans that are paid back over time, along with a premium, via a percentage of revenues. For the small business, this provides flexibility during a downturn. For investors, it can provide a greater potential upside than debt, without the need for structuring an exit.
Twenty-one days is not a lot of time, although for a small business owners, it might be enough to lay off its staff, or stop drawing a salary, or even close its doors for good. But twenty-one days also might be enough for an investor to make sure that none of these things happen. By pulling together resources, partnerships, and with innovative thinking, investors have the power to bolster not just our economy, but our communities and our families.
Natasha Dinham is a Senior Project Manager of Innovative Finance at the UCT GSB’s Bertha Centre for Social Innovation & Entrepreneurship