Raising funds after the lockdown
This story is the fourth of a series of stories about what we are experiencing as a fundraising advisor being close to both startups and investors during the coronavirus outbreak. In the first three articles, we dug into the current situation from a macro perspective, then predicted what was going to happen to the VC market while and after the lockdown and finally took a look at how we could boost startup investments. This new story focuses on how to raise funds after the lockdown.
To illustrate the intrinsic risk and uncertainty surrounding entrepreneurship, Reid Hoffman, founder of our beloved social network Linkedin, rightfully portrayed that “An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.” Yeah well, turns out in addition to the cliff and the plane assembling stuff you also have to do this whilst in the eye of a massive hurricane. Now, isn’t it getting tiresome… So, how do you cope with the hurricane ?
During the last decade, the path to success has been : steep, crowded, narrow … and now impossible?
With funding rounds having plummeted by 22% in March and valuations dangerously dropping, founders are understandably getting worried they won’t be able to raise their next round. Lately, everyone’s been on deck looking for solutions so they don’t end up at the bottom of a once-blue unbridled dark ocean.
Since the beginning of March, there has been tons of literature on the subject that I won’t bother to paraphrase. But bottom line : it’s unclear how long the lockdown is going to last so the only thing you have to do is extend your runway by maximising your revenues whilst reducing your burn. Be relentless in your focus on cutting costs and streamlining operations. Eliminate side projects or other under-performing business units that are not contributing to the core value of your company’s product.
These are tough times, so it’s not easy to come up with any kind of one-size-fits-all recipe in this context. If you can’t get funding, and you can’t extend your runway, I don’t think there’s a prescriptive magic-type formula to help you out. It is (and will be) just hard. It is hard to be a startup and it is even harder to be a startup during a crisis. But if you succeed in extending your runway with all the tools you have at hands, if you want to be part of the elite startups who are going to raise anyway in 2020, here are some tips.
Actions speak louder than words. Time to shine !
It’s one thing to read and recommend “The Hard thing about hard things” by Ben Horowitz to all your entrepreneur friends, it’s another to act accordingly. Now it’s your time to shine and investors are watching it from their front row seats.
As traction and growth will be reduced for the next few months, investors are going to place a particular focus on founder’s resilience skills. A great deal of an investor’s job is trying to figure out how entrepreneurs think and act, particularly under pressure. So I think they could be impressed by entrepreneurs who think fast, act fast, come up with new ideas, maybe slightly pivot, get scrappy, etc. Indeed, smart pivots perfectly thought through and conducted in those times could seriously impress investors further down the line.
Plan your next round : identify new strengths
Obviously, fundraising isn’t going to get any easier as stock markets tank and investors may shy away from deals. Still, though it may seem counterintuitive, the current situation actually means you should start planning your next round early, because it’s probably going to take longer to close. Indeed, anticipate your next fundraising to take six to eight months, instead of the usual four to six months.
Entrepreneurs need to prepare for a recession and need to know how to raise capital in a down market. One of the best ways to do so is to prepare beforehand. First, entrepreneurs need to establish a clear defensive moat around their business metrics with a strong focus on profitability. Investors respond positively to this in down periods given that so many of their other portfolio companies face significant threats.
Secondly, you should seek to get to profitability by any means possible. In strong economic times, profitability is prized by investors because it indicates the health of a business with or without venture investment. In a down economy, when growth is scarce, having a business with moats and profitability can place you as a part of the small elite of entrepreneurs.
Pitch different
In the midst of an economic crisis, most people focus on what is happening right now. But VCs are long term investors. Since markets are cyclical, and every crisis is followed by a boom, your job as a founder being forced to fundraise in an economic crisis is to remind potential investors that they’re seizing an opportunity to make money based on where the market is going, not where it currently is. “Now is the time to invest,” you’ll want to remind the people you’re pitching, “because this opportunity is going to be huge when the markets turn around. If you wait until then, it’ll be too late to invest.” So relentlessly remind investors that the opportunity is about the future. Work on your storytelling and vision to get the message across.
Also — I got this feeling a lot lately talking to startups, and it’s kind of unpleasant — , do not lie (or underestimate) saying it’s business as usual and that the impact on your business will be light. It might be true for some, but it’s not the case for the vast majority of startups. So please don’t go into a pitch meeting or call and not address the aftermath of the crisis on your business. As a matter of fact, investors will prefer someone with acute comprehension of the situation rather than someone who can’t face the truth.
Find a way to gather information about the investment ecosystem
The last decade has seen the investment ecosystem flourish, giving birth to many different forms of investors. Each investor having their own way of thinking and processing investments, of course. But unfortunately, according to their lifecycle or nature, some of them might disappear for a while — most likely family offices and corporate investment funds for example.
We also spoke to a lot of investors recently and it appears that fund’s lifecycle is key in how investors think about capital allocation. The relatively young funds will most likely make no changes in their money allocation between new deals and reserves for supporting their existing portfolio. Conversely, investors with older funds indicate making changes to their initial new vs reserve balance. Most seem to be taking a defensive stance, reserving additional capital to support their existing portfolio. The other smaller group is playing offensive, allocating more capital than planned for new checks, which they expect will yield better returns.
Finally, investors convictions about their investment criteria are disappearing as uncertainty grows. Indeed the metrics you needed to reach in 2019 to be VC compatible will most likely move in the next few months. It is therefore necessary to be as close as possible to them to detect and anticipate changes in their behaviour.
Be flexible/humble about valuation but watch out for the vultures
In a growing economy, entrepreneurs usually have the upper hand as valuations are being driven up and investors have less power in negotiations. On the contrary, in a down economy, investors often have the upper hand as there is less capital available on the market.
As I mentioned in my latest post, among other things, valuations and round sizes are going to be lower reflecting the new market conditions. Do not be afraid to take a down round if you have to. Whatever you do, focus on staying alive. Otherwise, you’ll be left holding lots of stock in a company that doesn’t exist anymore.
Encouraged by the uprising investment ecosystem we experienced over the last years a few deviant behaviours from investors. Some seem to have a lot to say about it.
Indeed, there have been a substantial number of reports lately describing bad behaviours from investors. What I mean is how can you know for a fact that your valuation is being crushed because of this COVID-19 situation or because you’ve got a rogue investor who’s trying to take advantage of you? Eventually, that kind of behaviours will make its way to the public and damage the reputation of those investors. But for the moment, don’t be the startup that has been screwed over.
Fortunately, there is still a large majority of investors with good intentions ! So the best thing to do is to run the end of your roadshow like an auction. Meaning you need to gather as many offers as you can on the table. Then you’ll be able to compare each investor according to both their quantitative proposal (valuation) and their qualitative proposal (how are they going to support you). And then maybe you’ll have to choose a slightly lower price but with a team of investors that will stick by your side whatever happens. You will be still be part of the elite.
This is the survival of the fittest so get your gears up and your best men on deck. Avoid inertia at all price and adapt as fast as you can. Don’t be afraid to make concessions or to get help from the outside. These are challenging times and it might be hard to face it alone. If you need help assessing the opportunities or getting insights on the market, don’t hesitate to send me an email (thomas@sharpn.eu) and I’ll be happy to help.
Sharpn is a fundraising advisor supporting ambitious entrepreneurs. We aim to support startups from late-Seed to Series A round.
So if you’re interested in our killer program please contact us at contact@sharpn.eu or visit our website https://www.sharpn.eu/
