Dealmaking during the COVID-19 crisis: A walk in the park?
To be or not to be open for business: a question that divides tech investors into two camps. On one side, all the VCs crowdsourced here claim to be open for business as usual. On the other, many have issued incredulous warnings that this is “false advertising at best”.
My experience at Speedinvest over the past weeks — as the COVID-19 health crisis turned into an economic meltdown — has been that founders and VCs face a choice. We either wait (and wait) for things to return to the old normal; or we work to understand and embrace the new normal. As shown by our 16 signed deals (so far) since February, we chose the latter.
Case in Point: Our First Fully Remote Deal
Weird times, weird term sheets
You read that right. The term sheet for one of our first fully remote deals required a founder to join us for a walk in the park (they chose Viktoriapark, FYI). We’ve learnt over the last weeks that remote dealmaking presents unique challenges (more calls and references needed to build trust), but also has lots of upsides (less travel, less bias towards dashing personalities). While a bit scary, we were still able to confidently move forward with investing cash in teams we’ve never met face to face. So while going for a walk in the park, post-term sheet, was not key to our decision, it seemed like a good way to start this journey together.
The founders in this example weren’t going to let a virus get in the way of their fight against chronic disease. They were determined to adapt and find a way forward with a partner who could understand them and be there with digital health and marketplace expertise at the ready. In the end, they signed us; we didn’t sign them. This deal didn’t wait for a new normal; it helped explore the possibilities and opportunities of what the new normal could bring.
Find ‘Outside the Box’ Partners
In a different case, we decided just before COVID-19 hit Europe hard to pre-empt the seed round of a B2B SaaS startup with very young founders and add hand-picked co-investors to let the founders find product-market fit with a smaller round ahead of a larger Series A.
Then Italy happened… then more lockdowns.
As everyone was busy helping their portfolio, responses from our shortlist slowed to crawl. Some said, “ummm thanks, but maaaaybe in a few weeks,” others stopped responding altogether. We decided that the show must go on. Plan B was outreach to investors normally interested in slightly more mature deals. Much to our delight, several amazing European funds were hungry to get on board and take quick and decisive action. We closed a phenomenal round a few days ago, with partners we wouldn’t have asked under normal circumstances — but who were eager to get behind even a very young team (also fully remotely) because of what they’d built.
Stay the Course with Valuable Founders
Another company we’ve partnered with has devoted two years to building a category-defining health software solution. Regulatory complexity pushed out market launch, and, with the COVID-19 crisis, plans to raise a big round pre-traction quickly fell apart.
Not wanting to abandon a great team, we decided to pivot our strategy. In order to extend the company’s runway and execute market launch we raised a seed round with existing investors. Valuation needed to balance overall market turmoil against the imminent shipping of a great (and increasingly relevant) product. Together with a number of well-known co-investors, we ended up putting together a large seed round, because great founders deserve credit and patience, especially when they hit a speed bump.
What I’ve learnt from closing these three deals in the eye of the storm:
- Right now, top funds worry less, downstream funds apparently struggle to commit.
- Great opportunities will still shine, even with young first-time founders, if they have bottom-up business models in obvious growth markets (health, e-commerce, etc.)
- Strong market and product fundamentals matter most. If COVID-19 matters, something else is off.
- For founders with good Zoom skills, now is the time. If founders are not strong on video, it’s hard to build conviction.
- It’s worth investing more time on calls and references. Dealmaking is still more efficient now than if we were flying all over the world.
My own experience across these three recent deals — and a look at Speedinvest’s deals over the last months — shows that dealmaking in the COVID-19 era is happening. Not all VCs are as active as they claim, but the environment isn’t as bad as some suggest. We do unusual things to make deals happen, but unusual is the new normal.
