A Blueprint for Raising Money in a Plague Year
By Alexander Rosen, Managing Partner & Co-Founder
“I met the founders for the first time at a coffee shop. Their energy was infectious, and we committed on the spot. It was clear how awesome the team was.”
- Said no one after March 2nd, 2020
Through 20+ years of investing in early-stage startups, the most important part of my investment decisions has always been the founders: knowing them, believing in their vision, wanting to work and support them. It’s a people-centric business. It’s a ten-year relationship on the board. Alignment matters.
Enter this pandemic. Enter our industry’s abrupt transition from the speed, impulsivity, and spontaneous insights of FOMO — to FODO: fear of dying out. Every day I’m hearing about term sheets being pulled, terms changing, layoffs happening. When people say, “I hope this isn’t the new normal,” I wonder what planet I’m on. This IS the new normal, for a while, and normal is now uncertain, impersonal, and really painful.
Zoom can only fill so much of the void. Interacting with founders from behind a screen, while a helpful workaround, can’t quite replace face-to-face communication. Not everybody has a 1GB connection, an HD WebCam, huge double screens, or someone to stop their kids from dancing in the background. And even then, as we all are quickly discovering, after 30 minutes you can tell the eyeballs on the other end of the Zoom call are scanning emails or Twitter. In this new virtual reality, it is easy to miss, lose, or never even get the high-fidelity experience of connecting with someone through a deep conversation. We literally can’t make eye contact given camera placements. The loss of this all-important human connection has the entire ecosystem in disarray.
How do you invest in the early stages when you’ve historically over-indexed on people, yet now aren’t allowed to meet the team in person? Without face-to-face interaction, how does a venture capital firm invest when trust and rapport have been foundational elements of investing since this industry started?
The Changes
Before tackling how Ridge Ventures plans to circumvent the challenges of screen-to-screen investing, let’s take a look at the big picture. Here are some immediate short-term changes I foresee as we enter the world of virtual venture:
1. Seed and especially pre-seed investing will dry out dramatically this year, and most deals will involve investors and founders who already know each other.
2. Early-stage investing will go back to its roots of being “hyper-local,” like in the 1960s. Depending on social distancing restrictions, it may be possible to go for a walk with a founder, keeping the requisite six-foot distance. Founders and investors could continue to get to know each other post-Zoom meetings by taking “partner walks,” but none of us will be getting on planes for a while. Bay Area firms will essentially not invest in Series A companies outside of the Bay Area.
3. Late-stage investing will continue but at much lower valuations. When companies are above $10M in revenue, there is a tremendous amount of data to evaluate; not so when you have $100K or $0 in revenue.
4. Many investors will be preoccupied with triaging existing portfolios, praiseworthy support of their founders, fundraising for their own funds, etc. — all the things we’ve seen in prior crises. Individual investors will pull back because of their personal finances, and some institutional investors will retire because it’s going to be just too damn hard for a long time.
5. The current environment will benefit, on a relative basis, namely companies that have mastered operating as a fully distributed team, like GitLab, and “bottom-up” selling, like Atlassian. More on that in another piece.
6. Recently, I’ve seen emails from many investors saying, effectively, “We are still open for business, no change.” That may be true for some but I don’t believe it will hold for the industry as a whole. The bar for new investments has risen dramatically overnight, with NASDAQ dropping over 30% (and likely going down further). So the number of deals and valuations will decrease precipitously.
Amidst this world in flux, and balancing our time with supporting current Ridge founders, we do remain open for new business, but we also have been thinking about how to “invest in a plague year.”
The first step is to not be paralyzed by fear. Then we go back to the basics: looking at the team, market, product, initial customer interest, and a fair deal, in that order. Some of that can be answered by Zoom meetings and phone calls, so that’s no different from any other year. But part of our job requires creative adaptation to the current environment. We need to find substitutes for multi-hour dinners which help us learn founders’ motivations, grit, and their ability to work together as a team. Equally important, founders must grasp who we are as a venture firm without the benefit of connecting with his/her board member in person, visiting our office, and the usual means of determining culture fit.
The Blueprint
Here is our initial blueprint of a remote process that is most impactful for founders. (As always, we welcome input from our community.)
1. Referencing each other becomes more important if you can’t spend time face-to-face. We expect to make more calls than before and highly encourage the founders to do the same in regards to us or any other prospective investor.
2. Since the team can’t come to visit Ridge and get a feel for our own culture, we need to get them information, whether it’s references, data, or new types of communication about how we plan to work together. (We just created a thorough document to help founders understand us.)
3. We see extended discussions about our personal leadership in working styles, including offering to share, bidirectionally, results of 360° reviews, especially external feedback (standard internal process at Ridge already). As a founder, you could get your board member’s collaborator-sourced “operating instructions,” not just a few fancy handpicked names. And we would get the same, or at least we can have a great discussion as to what that would look like.
4. Founder mental health matters. Running a startup was already stressful, and it just got a lot tougher. I have always viewed our role as that of a consigliere (see Godfather) which means not merely supporting the business, but also the founder’s emotional ups and downs of building a business. We are committed to providing more emotional support, financial support, and a set of best practices, including the availability of personal coaching as part of our investment.
5. We have always prided ourselves on being fast, flexible and founder-focused. We do anticipate our diligence process taking longer and having additional steps, and, as in the past, no one term is sacred in our term sheet and we don’t expect our terms to change dramatically. (A great Series A investment at $20M valuation is still a great investment at $30M.)
This is our starting point. Check back in a month, though, and it will surely be different, as everything is changing quickly right now. And please let me know if you have ideas on how to continue making great founder-investor matches in the era of Zoom. We’d love to hear from you.
Thanks to Jerry Colonna for his suggestions, including the title’s reference to Daniel Defoe’s Journal from a Plague Year.
