From where I’m sat, the market sentiment turned the moment Sequoia Capital published their Medium post titled ‘Coronavirus — the Black Swan of 2020’. Charles Darwin’s words rang in the ears of the global technology community, investors and founders alike, “those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.’” This message sent shockwaves through the industry and led to some funds pulling from ongoing deals, and others closing to new opportunities all-together.
Once the dust had settled, and high-level decisions had been made, there was understandably a lot of confusion as to where this left startups seeking funding:
Many funds (RLC Ventures included) submitted their details to the COVID-19 European Investor List and to make clear their current investment status, with the vast majority (95%+) indicating they are actively ‘open for business’ — and this was not purely a European reaction, as seen by Chetan Puttagunta’s tweet back in early March:
Overall, the long-term view on entrepreneurship remains unwaveringly positive, with investors in no way doubting brilliant businesses will be founded in 2020 and beyond.
With numerous large funds announced in 2020 alone (Index X €735m, Atomico V €750m, Speedinvest III €190m, Target Global II €120m), there is certainly no shortage of ‘dry powder’ to deploy across Europe. But even well-capitalised funds are not investing with quite the same vigour as seen in the years proceeding this.
Unfortunately, the industry of Venture Capital is not driven by optimism and positivity alone, and there are wider forces and considerations that need to be made prior to continuing to deploy capital. The General Partner <> Limited Partner arrangement requires fund GPs to raise and draw down capital from the LPs (fund investors) prior to and at the time of investments being made.
For many funds, as listed before, LPs are massive endowments, trusts and institutional investors, with diverse portfolios of varying levels of liquidity and risk. Now unless you are a Tier-1 VC fund with 2+ decades of investment track-record behind you, the implications of coronavirus on your existing portfolios might significantly impact your ability to raise future funds.
Bearing this in mind…
At the beginning of a rapidly spreading, global pandemic, it is hard to know which sectors and industry verticals will suffer the soonest — and as such, continuing to invest through the initial few weeks of macro uncertainty ads increasing risk, as some industries will inevitably struggle more than others in the next 12–18 months (travel, hospitality, tourism, retail etc.)
But early data from funds such as Partech shows ~20% of their portfolio have seen “accelerated growth during the crisis while the rest stagnates or falls behind”.
Any VC ambiguity in messaging or reluctance to commit to new investments could very well have been a product of them regathering their thoughts, whilst trying to understand the road ahead and immediate impact Coronavirus will have.
This is a fairly obvious point that ties back to the notion of track record and fundraising. With the vast majority of portfolio companies seeing a slowdown or significant drop in growth, alarm bells will be ringing in investors heads. Capital and resource management is a priority above all else, and unless founders are able to manage their runway and make often difficult, but quality decision, it is a very real possibility that the companies will fail to make it through the impending recession.
Being on hand to deal with any portfolio requests and to offer advice where needed becomes an increasing time sync, and will inevitably mean less time being spent on new investment opportunities.
Making new investment decisions is not an overnight process even at the most stable of times. Multiple calls and meetings need to take place, with time spent face-to-face between Associates, Partners and the founding team being of the highest quality and signal.
Due to obvious reasons, remote-only restrictions lead to disruption in the traditional investment process, which in our case, definitely took a few weeks in order to get used to.
The stages now involve more video calls, for longer periods of time, as well as additional reference checks and founder profiling. All of this can, and has, led to a decrease in speed and efficiency, but we expect this to improve as it becomes a more well-structured process.
Overall, these inefficiencies associated with adapting to remote life and the reprioritisation of investor time, have both been reflected in the 35% decrease in deal numbers compared to the same period (23 March until 18 May) last year. Whilst this decrease is noteworthy, I believe that it will recover as the investment community collectively adapt.
TL;DR: VC’s aren’t ‘closed for business’, they are just being more cautious, focusing on existing parts of their portfolio and taking more time over ongoing deals.
Do your research on who you are pitching
This is advice that is always relevant, and not pandemic specific. It is more important (and difficult) now than ever to build rapport with the investors you are speaking to, so doing your homework is always going to help.
Firstly make sure they invest in opportunities at your stage and in your industry, and then spend a bit of time reading a recent investment announcement or post by the firm. Showing the investors that you have spent some time understanding them always adds value to your application, as the team know you aren’t just pitching everyone (even if you are).
Open more conversations than you would have in normal circumstances
This probably goes without saying, but you should be having more conversations than you previously were. The slowdown in volume means that even if you might be the perfect fit for a fund, they may just not have the bandwidth right now — so ensure you are accounting for this in your fundraising strategy.
Address the impact Covid will have on your business, and how you have altered your roadmap/raise target/KPI’s.
Explain what measures you have already taken, as well as those which you will probably look to address in the next 6 months. Here investors will be assessing your crisis management and decision-making framework.
You could present two scenarios for use of funds, one with a more long-term negative view on Corona, and one with a more optimistic outlook. How will your KPI’s differ? What will you prioritise if markets return sooner than expect/slower than expected?
Prepare/offer some contact details of references for VCs to speak to (don’t cherrypick)
If things are progressing nicely, the firm will likely want to spend some more time with you. Typically a meal or drink or coffee can help scope out a potential working partnership, but the Video Conference restraints make this impossible.
It would be worthwhile having some contact details of previous colleagues, employers, employees, investors etc. to hand, just to ensure this doesn’t hold up the process. Just be sure not to cherry-pick as often we want to understand areas of weakness in founders so that we can help them strengthen the team in the right areas.
Ask for clear next steps after meetings, and what the investment process currently looks like at the fund
After each meeting, finish the call asking what the end-to-end investment process looks like, as well as guidance on timeline and next steps. This isn't going to set you apart, but what you do with this information might.
Send follow-up emails that align with the timings they set out, and keep them updated on any advancements in the funding round (new commitments, people you might like to be introduced to).
Overall, fundraising is not an easy process, even at the best of times. Importantly, ensure you can block out a good period of time for the fundraising, as beginning the process without 100% focus will show.
To keep an eye on which businesses are being funded post-covid, you can subscribe to my weekly newsletter which covers seed funding rounds across Europe and Emerging Markets.