Getting VC Investment in the COVID-19 Era
I had a fireside chat with Robin Wauters, founding editor at tech.eu, at the UPPSTART startup conference this morning, hosted virtually on Hopin. The topic we discussed is top of mind for many entrepreneurs right now: how feasible is raising venture capital in the current environment?
At Accel, we have invested more actively than any other global venture firm during 2020. In my discussion with Robin, and in this post, I wanted to share what has and hasn’t changed for VCs during COVID-19, and some tangible ideas for founders looking to achieve a successful capital raise.
To supplement my own experiences, I’ve spoken with over 20 other investors at Seed, Series A, and B funds in the US, Europe and Israel, along with CEOs we at Accel have been proud to partner with during these challenging times.
Stepping back, what’s the VC environment like right now? When lock-down kicked in, VCs initially focused on existing portfolio companies, working intensively to support strategic, operational and financial responses to the pandemic. However, since May, most funds have been squarely back in investing mode, with two notable shifts: (1) flights and in-person meetings have made way for Zoom and Slack; (2) businesses which thrive in a remote-first world have become more sought after by investors. Recent Q2 data from Pitchbook (US/EU) and Wilson Sonsini’s Entrepreneur’s Report suggests that the VC industry on aggregate has essentially continued its trend of larger investments, higher valuations, and shorter times between rounds.
Three key reasons why the global pandemic hasn’t had a more negative impact on VC so far:
1) 💻 Digital transformation has radically accelerated. Companies in all industries are being forced to adopt technology in response to the challenges of a remote-first world. The COVID-19 dislocation is creating unprecedented market opportunities for software companies across all application and infrastructure categories, and also for industry disruptors which can leverage software more successfully than their legacy competitors. For example, Kry is disrupting the healthcare industry using digital technology, and Sennder is doing the same in the $120B European road freight logistics market.
We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security — Satya Nadella, April 2020
2) 💰 Investor dry powder is at an all time high. The world’s largest asset managers (pension funds, sovereign wealth funds etc.) have had to search harder for yield ever since the global financial crisis and the ensuing monetary policies of low interest rates and quantitative easing have driven bond yields down to all time lows. The result has been a major rotation in asset allocation over the past decade towards equities, private equity and venture capital. Huge inflows means that PE & VC investors have more available capital to invest (‘dry powder’) than ever — $2.5 trillion as of the start of 2020. This capital ultimately has to get invested and is leading to competition among investors at every stage of the private financing lifecycle, even through to exit where PE firms now regularly outbid strategic acquirers.
3) 📈 VC sentiment closely tracks the public markets. Despite the fact that VC funds typically have a 10+ year investment horizon, it is a well-researched phenomenon that the venture investment climate is highly sensitive to the public markets. The stock market is currently at Fed-fuelled all time highs, with software valuations in particular at unprecedented levels: the median EV/NTM revenue multiple for public SaaS companies has doubled from 7X in January 2019 to 14X today. Moreover, public investors have been attracted by the resilience of SaaS to the challenging macro environment — B2B SaaS stocks are up over 20% on average since the COVID-19 lock-down began vs. a flat S&P 500, and top performers like DocuSign and Zoom are up over 100%. Against such an buoyant stock market backdrop, VCs have been finding it easier to build conviction and ‘pay up’ on entry into new investments.
Whether the current environment will persist in the next 6–12 months is a separate topic. The macro situation remains brittle, with potential exogenous shocks to come from the US presidential election, vaccine development timing, geopolitical tensions, and other unknowns. A recent survey of 1,000 VCs found that VCs expect to deploy capital at 80%+ of their normal pace over the coming year — in the near term, we are expecting a frenetic Q3 as many startups which have weathered the initial COVID-19 storm feel ready to continue scaling.
What’s the best advice for founders looking to raise capital now? The biggest change in practice for VCs since COVID-19 has been the shift to remote — in most other respects it is ‘business as usual’. What has become harder is the ability to establish the trusted relationship between entrepreneur and VC which serves as the basis for every successful partnership. Here are 7 practical tips for founders looking to raise capital in the current environment:
Initial connection and pitching
- ⏰ Start early. What’s more challenging than establishing a multi-year partnership over video conference is trying to do it in the space of just a few days. Better is to start conversations with your potential future investors months (if not years) in advance, in order to build a rapport, get aligned on KPIs and be able to show progress over time. Use learnings from constructive VC meetings to adapt and improve your pitch.
- 🎯 Focus on a relevant shortlist. Building relationships with investors is a big time commitment. Save time by limiting scope to a relevant shortlist based on existing relationships and active VCs in your stage, sector and geo. When reaching out to VCs, being highly personalised and identifying relevant portfolio companies can help to establish credibility. Be sure to asses prospective investors’ sector knowledge and value add through questions and referencing.
- 👩💻 Use tech to your advantage. Set yourself up for success on video meetings with a quality camera, mic, lighting and internet connection. Being highly responsive on email and WhatsApp also helps to build trust. Consider using tools like Loom and mmhmm to bring pitches to life. When presenting alongside co-founders or team members, be intentional about who contributes what, in order to showcase your team’s strengths.
During due diligence
- 👓 Transparency and structure is key. In the absence of being able to spend days together at your offices reviewing information, having well structured data ready to share with investors can help both to accelerate the process and also to increase trust. Some companies have taken this to new levels, sharing Zoom recordings of all-hands meetings. Be open to providing extra references and expect your investors to do the same.
- 😷 Acknowledge COVID-19 but don’t be defined by it. Whether COVID-19 has been positive, neutral or negative for your company, share your narrative briefly and then focus on your strategy for future growth. VCs have a long time horizon and are backing what your business can become in years to come, rather than acting on the basis of short-term trading.
- 🤝 Really get to know each other. Make time for informal sessions with your prospective investor to get to know each other in an open-ended way — a Zoom coffee or socially-distanced walk can work well. Prepare to open more connections to your team, customers, partners, former investors and other contacts, to help overcome the shortfalls of remote due diligence.
What’s coming next
- 📉 Be prepared for macro whiplash. It is quite possible that we will have severe market volatility in the coming months. Do not be shocked by this. Ensure that you are raising at least 18–24 months’ runway. Keep focused on building the leader in your category and good things will happen.
