Pre-seed investing in times of Corona
Companies are currently doing what they can to manage the current situation while trying to predict the future development. But how do you actually do that when your company is still at a very early stage? And what about your investors?
The outbreak of COVID-19 has brought unprecedented challenges for all of us. While there is a lot of information about the economic impact of the virus and its ramifications for startups and investors floating around the internet, not much of it is geared towards pre-seed investments.
You can read dozens, if not hundreds, of blog posts about seed & series A startups, venture capital funds and on how they manage the situation and how they predict future development. These companies have a “slightly” better predictability, at least on the cost side of the business and a better understanding of their runway.
But what about the companies that are in the ideation stage? What about those startups that merely have put a digital product together? How are they dealing with the uncertainties imposed by the crisis? And how are their investors dealing with it?
Let’s take a look at how early-stage companies are affected by the current crisis, especially in terms of revenues, products, and fundraising.
No revenues = no loss of revenues
The good news is that no revenues will be lost due to the corona lockdown since these companies haven’t generated revenues yet. However, on the downside, market launches must be postponed. Many PoCs are being canceled, so that building up a pipeline is very tough. This has an impact on the runway and puts even more pressure on companies to stay lean.
Using the time to perfect the product — without much user feedback
Many of our teams mainly focus on their products now, making them ready to go full steam once the markets gain momentum again. For them, the problem is that potential users, particularly B2B, have bigger fish to fry. User-centric product development is thus more difficult since it depends on constant user feedback, which is tough to collect these days.
Facing many uncertainties in the field of fundraising
Fundraising is where pre-seed companies are hit the hardest by the crisis. Typically, our startups raise additional capital through business angels (usually between EUR 200.000 and 500.000) and then opt for venture capital seed rounds (north of EUR 1.000.000) nine to twelve months later. Some companies that were able to generate early traction and momentum can even raise immediately after our program from institutional investors, such as VCs or Corporates. But things are different these days.
Many business angels are certainly more hesitant to make new investments now and reserve their liquidity for potential additional investments in their existing portfolio if they are investing at all. Some continue to invest in new startups. However, overall investments slowed down, because business angels typically want to build a relationship with the founders which is tougher these days due to social distancing and remote work. Furthermore, founders typically meet NEW business angels through physical events — a format that is currently not an option anymore.
Venture capitalists are facing different challenges: Although VCs typically reserve a portion of their funds for follow-on investments (and are thus a bit more in the driver seat), it still remains unclear how new investments are affected. Most of the VCs we spoke to say they continue investing in companies, however with a large disclaimer that they set the bar very high and increased scrutiny. Some even expect valuations to go down significantly. This puts even more pressure on startups to seek for business angel investments or other alternative sources of funding. And VCs that are currently in fundraising and haven’t closed their funds yet, need to fight on a whole different level — securing LP commitments and mitigating the risk of LP defaults.
How we at APX move forward
At APX, we might even be considered an “earliest stage” investor — we support many companies when there is no other investor on board yet and, in most cases, our portfolio startups are barely getting ready to launch their MVP. Frankly said, our return is directly linked to our startups’ ability to fundraise. If no other investor provides liquidity to our startups, they typically face insolvency within six to twelve months and our initial investment is lost. Pre-seed companies have the luxury of pivoting and being lean. However, it is impossible for them to be cash-flow positive at this stage.
Given what I said about the fundraising market before and the fact that we continue to invest as usual and onboard companies digitally into our 100-day tailormade program — here’s how we manage to operate in these times of uncertainty whilst keeping and increasing our portfolio value:
1. Encouraging startups to cut costs
Typically, we encourage startups to have a growth mindset, encourage them to set ambitious milestones and show a “hustler” approach to reach these goals. That normally means that our startups need to spend significant capital to get there and thus typically face a maximum runway of six months. Given the current situation, we encourage all our founders to try to expand their runways to at least ten to twelve months assuming no revenues and twelve to eighteen months with very conservative revenues assumptions.
2. Identifying low-hanging monetization fruits
This is a point where opinions are divided. Especially pre-traction startups are always struggling between staying flexible and focusing on one business model or form of monetization. This is the crucial point they want to validate at this stage to signal to seed VCs their investment readiness and scalability. Many argue that bootstrapping revenues will make you lose focus and prevent you from seeing the bigger picture. But desperate times call for desperate measures. We advised our companies to be “creative” and think of ways to monetize their current product offering or skills in a way that can be monetized easily and quickly without too much distraction. Signaling to VCs that you have it all figured out in a crisis is not as important as expanding your runway and decreasing your burn rate — why? Because it buys you time! And time is currently the most important resource.
3. Making use of public funds
This is a no-brainer. Even in “normal” times, we always advise our startups to look for any sort of “free equity”. Public grants and support programs are a great source for that. Now with different forms of Corona support, we encourage startups to apply for these stimulus packages and see if they are eligible for support
4. Engaging with our investor network
It has never been more important than now to seek active engagement with our investor network and to stay as close as possible. Apart from 1:1 interactions with our closest contacts in the ecosystem, we leverage the benefits of the current remote stage and try to attract even more investors for our digital pitch formats (i.e. our weekly Pitch Tuesday for current program startups or a complete digital demo day format beginning of May).
5. Encourage founders to use the community
At APX, founders are never alone. Our portfolio counts more than 50 companies, and because we work so closely together with all of them (we are literally sitting next to each other for 100 days), our portfolio is a community and resource we encourage all founders to harvest for synergies and ideas sharing.
As you can see, a lot is happening at the moment and it’s an incredibly unsettling, but also an interesting time. No matter in which stage you are, try to keep going. And if you’re an early-stage startup: We at APX are still investing — apply here!
