VC fundraising in a pandemic
We are in a state of an unprecedented global health crisis. Coronavirus has spread with similar speed and impact to an earthquake – with confirmed cases surpassing 5.5 million people in under six months’ time. Economically, according to IMF managing director Kristalina Georgieva, the world is facing the ' A shock to the system, which has transformed the way we work, communicate and live. And fundraise. Last week a research by Plexal and Beauhurst revealed investment in UK tech startups has dropped by 50% year-on year. What should companies fundraising know, how to prepare and how has the VC landscape changed?
Startup advisor and mentor Tzvete Doncheva kicks off our new series (Re)StartUp Strategy with a look back to our ‘Money, money, money’ webinar.
The market dynamics
Venture capital is a form of private equity that already involves a degree of uncertainty – capital invested in businesses where both the return/risk potential are high. A VC firm’s willingness to make new investments depends on its risk tolerance, fund cycle and ‘dry powder’ (cash available to deploy). What changes have the pandemic and the increased uncertainty brought to the VC market?
The slowdown already shows. First-time investment in tech companies is down 83% and there is a 35% drop in UK deals made compared to the same period in 2019. There is a great focus on supporting portfolio companies through attention and capital. Yet European venture capital firms have more dry powder than ever before (raised over €20B in 2019 and 2020 alone). There is a great focus on supporting portfolio companies through attention and capital.
“The impact of the crisis on our pace is not on whether we freeze the process or continue as it was. We take into consideration the additional amount of dry powder of the fund to be allocated to existing portfolio companies to weather the storm as the “COVID Virus reserves” to determine the euros left for new investments.” – noted Jean-Marc Patouillaud, Managing Partner at Partech, a global investment platform for tech and digital companies, led by ex-entrepreneurs and operators of the industry spread across offices in San Francisco, Paris, Berlin and Dakar.
This was referenced at my ‘Ecosystem’ initiative in April. Shortly after Partech announced its latest $100 million seed fund to invest in post-COVID19 trends in health, work, commerce, finance, mobility, and computing.
Governments across Europe have implemented new alternative funding mechanisms too. In the UK, The Future Fund, a scheme to support high-growth innovative British start-ups through convertible loans (between £125,000 and £5m) launched last week.
According to Beatrice Aliprandi, senior associate at Talis Capital, an early-stage London-based venture capital firm, the programme is a great initiative. Her tip to companies is “to get all consents out of the way early, keep lawyers and investors aligned and informed at all times, and apply as soon as possible.”
You may find more on eligibility/government support available (including Bounce Back Loans, Coronavirus Job Retention Scheme) here. For timely updates on the schemes, I recommend subscribing to The Entrepreneurs Network’ Policy Updates e-bulletin.
In general the Q1 and Q2 earnings will help VCs determine the wider effect across sectors – and the longer term impact on consumer/enterprise spending behaviour. This information will also shed more light on the ‘when’ of deploying VC dry powder and the ‘how’ of pricing new investment rounds.
As the situation unveils, the initial market shock is replaced by selectivity, with a big focus on fundamentals - ones ideally aligned for a post-crisis advantage.
There is more emphasis is on start-up profitability over growth –prepare your company internally for both the fundraising journey and a challenging year(s) ahead.
- The success of your fundraise will depend on business metrics AND on the macro environment
- “Growth at all costs” is now “growth with a profitability outlook”
- Fundraising will take longer. Uncertainty, a change in processes and economic risks, the lack of in-person contact. It’s not easy to build trust and rapport online. A slow response time doesn’t necessarily signal a lack of interest from investors.
*It is no longer a bull market - the valuation you got 3 months ago will change.
*Even FinTech market leader Monzo faces a near 40% valuation drop in its latest fundraising.
Getting investor ready: Restructuring
Cash truly is king. Assess your strategy and map out the changes needed to ensure your company has enough runway for *at least* 12 months.
What is optional and what is the core of the business?
This internal restructuring will have a direct impact on your fundraising efforts. Optimise your company for runway rather than valuation - do not wait until the market opens up. Review and update your strategy regularly to ensure relevancy. As Sequoia Capital, one of the world's top venture capital firms has noted not once, adaptability will determine the winners.
Areas to look into:
How are your (potential) clients accessing information now?
- Review all marketing activities – cut back on customer acquisition cost.
- Focus on organic marketing channels (which can be just as effective) by creating content of value to users.
- Listen to your customers and reflect back on consumer changing behaviours prior to setting out a future marketing budget.
*There will be a drop in both social media advertising cost and in people’s general willingness to spend.
- Focus on building up the monetisation potential for a later date and on product development.
*Depending on your product or service, it may be harder for new users to convert into paying customers.
From rent to working capital
Adaptability and flexibility is key –very few costs are really ‘fixed’
- Try to service demands based on your current inventory.
- Add incentives (a percentage of discount for immediate payments) to ensure your enterprise clients pay.
- Reduce low or non-performing leases and renegotiate rent.
- Review all your administrative expenses – software subscriptions, Cloud spends, external professional fees. Freeze or let go of services not being used.
Re-evaluate your business down to the bone but also look out for your team. As a founder, you can’t be 100% certain if you are cutting enough cost or it has gotten too much. Retaining the top, versatile talent who helps you adapt and move quickly, will ultimately enable your company to push through the crisis. Over communicate and set a good leadership example. Letting go of team members is not easy but not making the right decisions on time will be harder in the long term. If you need to do so, empathy and integrity is key.
In addition to the economic crisis, an internal misalignment of your team will be just as dangerous to the overall company state. Have you noticed any of the following?
- A lack of clear communication, team members operating in silos.
- A lack of focus, several projects are run but no measurable progress achieved. At the same time deadlines are missed and a lot of backlog work left undone.
- Team members disengaged and are strictly sticking to their specialised roles.
Assess the strength of your start-up’s internal infrastructure (where resources are allocated) and the capabilities/motivations of your team to ensure your company is prepared to pass through the crisis and is investor ready.
How has your company’s value proposition adapted to the changing external environment? What is the value your startup is bringing to customers?
According to Eric Reis (The Lean Startup), “pivoting is a change in strategy without a change in vision”. It is not the response to any problems with the business model but a reassessment of the direction you must take in order to keep the value proposition relevant.
Factors to assess:
- Who is your audience (has it changed?)?
*Many companies pivoted to target essential workers
- Is your startup servicing the same need/problem?
- How can you make your offering most relevant to your existing and potential clients now?
True leaders stand out in times of crises – they are able to sense environmental signals, assess implications, take initiative and drive change forward.
Which VCs are investing and how to approach them?
There is an abundance of resources aiming to map out the market to provide an ‘insider’ view of VC activity levels (examples here, here and here). Try to do your research to identify the firms that may be interested in your business and have a higher probability to be active.
As a general rule, when making a priority list evaluate:
1) The sectors/stages/geographies a venture capital firm invests in
Based on this, will your business be a match?
Unless your start up is completely rethinking a category, look for a degree of similarity with companies in the existing portfolio. It is unlikely (although not unheard of) for a VC to back two rival companies.
2) When has the fund last raised?
To be active, a fund has to have capital to deploy. Venture capital firms are fundraising too.
3) Where is the fund in its cycle?
*A very rough estimate of the amount a fund has deployed in companies to date can be made based on existing information online – average ticket sizes and announced investments.
4) How to approach them?
Once you’ve made your list of venture capital firms that invest in your company’s stage of development, vertical, geography, identify the specific investors you should reach out to.
Have they invested in similar niches?
Can you find any common interests which you can bring up?
- If sending a cold email pitch, make your message targeted yet as straightforward as possible.
- Highlight very clearly the problem your company solves within its industry (why the solution is even more relevant now). If you have numbers to support, include them.
- Address why you would like to connect with this specific investor.
Use the time to build and strengthen relationships. In early stage rounds a lot of the decision is based on you.
A few points to be mindful of
- The 5 Ps - Proper Planning Prevents Poor Performance
Prepare and practice your presentation. Know your financials. Confidence goes a long way in making your pitch more engaging and memorable.
*Research the VC you are pitching to (if different) – focus area, previous investments, interests.
*Ideally have at most 2 members of your team join. Plan out who will cover what.
- Send your deck in advance and prepare your environment
Minimise possible tech difficulties (screen share fail) by emailing the presentation to all meeting participants. It gives the investor the opportunity to request any missing information (and for you to have a ready answer, if this question pops up).
Make sure your environment (and background) is professional. Test the internet connection, audio and video capabilities. And start with small talk.
- Be honest about what you (don’t) know
Show you are aware of the market dynamics and explain the first and second order effects of Coronavirus on your business. Give examples of key decisions you took to help your company better adapt to the current environment.
- Questions, feedback, follow up
Give the investor the opportunity to set the pace as you are presenting.
Would they like to hear the full pitch and then ask questions? Or they’d prefer to add in comments as you go along? Getting feedback is invaluable. Always follow up – try to establish a long-term connection and trust. And if possible add value – it could be as simple as making a relevant intro.
Entrepreneurship is similar to running an obstacle course, with setbacks and roadblocks present even in the best of times. Can you turn some of the challenges into opportunities? Channelling them into catalysts for growth will set you apart as a founder and will show your resilience to investors.
Every two weeks, the (Re)StartUp Strategy series with Tzvete Doncheva will offer insights from the VC world, bringing you a step closer in your fundraising journey. What would you like to know on investor readiness, positioning and overall growth? Submit your questions and suggestions to her here.