Are VCs Really “Open for Business” and If So — What Does That Look Like In Reality?
With 41% of startups operating with less than three months of runway, and stories of investors withdrawing term sheets (Startup Genome found that this had happened to nearly 20% of the startups they surveyed), it would appear that raising capital has become incredibly difficult for startups. That said, most of VC Twitter and numerous LinkedIn posts by prominent funds seem to tell a different story: namely that they’re “Open for business!” and that there’s still a large amount of capital available for startups.
So, what’s the reality of fundraising during COVID-19?
We spoke to a number of funds from different geographies and different investment stages to ask what their response to COVID-19 has been (with some highlighted below!).
A few key themes emerged from VCs:
- Yes, we’re still investing, but deals will take longer, might be smaller and diligence is more stringent.
- We’re prioritising our portfolio.
- We expect a lot of exciting opportunities in certain industries, so we’re focusing on those areas.
Let’s unpack these.
#1: We’re still investing, but deals will take longer, might be smaller, and diligence is more stringent.
The relationship between VC and startup is key to a successful investment — it is, afterall, a 5–10 year commitment, and it’s much harder to get out of an investment should the relationship go sour (the WeWork/SoftBank debacle is an obvious example).
So the idea of investing a sizable amount in founders who you’ve never met before would understandably seem odd to most. But a lot of the investors we spoke to were positive that this won’t be a huge issue for their funds.
Most investors said they are “absolutely actively still investing” (Henrik Wetter Sanchez, Playfair Capital) and that it’s business as normal with some obvious changes to the usual coffee meetings and catch-ups. Chris Ahn from Index explained “We have resorted to Zoom meetings in lieu of in person meetings, but no other part of the investment process has changed for us.”
And Phoebe Arkell from Rooks Nest Ventures shared “Before COVID, we had already invested in two companies and committed to another firm that none of the team had met in person and only spoken to over video calls. As a result, we are already comfortable with working (and investing) remotely.”
Tess Hatch from Bessemer Venture Partners echoed this sentiment: “I’ve been surprised by how easy it has been to transfer diligence to Zoom. There is almost a more personal element to the meetings — I am able to learn about the entrepreneur when a dog jumps into their lap or a child interrupts about their really important LEGO.”
But the inability to meet face-to-face can still pose a challenge for VCs when it comes to assessing founder-fit for deals they have in the pipeline. Oliver Kicks (RLC Ventures) shared how the RLC team “have had to look at other ways to get a strong understanding of the team we are investing in. This means more reference and network calls, as well as founder personality profiling.”
And as for capturing VC attention, startups will need to prove their strength and ability to get through this crisis. “Our diligence process has even more focus on a company’s cash management and runway” (Amit Bhatti — 500 Startups). This was a sentiment echoed by other investors we chatted to.
VCs do, afterall, sit on a lot of dry powder and there have been a number of significant new fund announcements both pre- and during the current global lockdown. These newer funds will have relatively more capital left to deploy than older funds, so entrepreneurs would be wise to focus on these for their fundraising efforts.
For an insight into a fund who has publicly said that they’re not “open for business” (and an insightful breakdown as to why this is the case), take a look at Fred Destin from Stride VC’s blog post here.
#2: We’re prioritising our portfolio.
Pretty much every investor we spoke to said that they are prioritising their portfolio’s needs and doing what they can to help their existing companies get through the crisis. From launching Wellness Programmes (à la Playfair Capital), webinar series for founders (as shared by Justin da Rosa from Battery Ventures), and helping with hiring to tackling the difficult questions surrounding restructuring and replanning — investors are providing a huge amount of support to founders during this time (see our recent “From the Founders” article for a deep-dive into what this has looked like for some of the startups on our Startup Program).
Oli Hammond from Fuel Ventures told us “We’ve now created a series of once a month digital coffees which allows founders to get together. Being a founder can be lonely so we think this is really important.” The importance of community has been highlighted since the outbreak of COVID-19, and this is showing within the VC ecosystem. “Providing a community for our companies to share and help one another” has been a key focus for 500 Startups, with many others setting up Slack groups and weekly/monthly webinars for founders to networking and share the challenges (or wins!) they’ve faced over the last few months.
Ollie Forsyth from Draper Esprit put it nicely: “It’s important that investors give as much support to their portfolio companies as possible. VC’s will always be remembered how they treat founders during uncertain times.” (Preach!).
#3: We expect a lot of exciting opportunities in certain industries, so we’re focusing on those areas.
There are, of course, some industries who have been hugely impacted by the global lockdown — with traveltech, last mile mobility and events startups being hardest hit. With revenues wiped out overnight and with lockdowns in place for the foreseeable future, the sad reality is that many investors are steering clear of these sectors.
But it’s not all doom and gloom for startups out there. “A number of sectors [have been] buoyed by the move to remote working” (Henrik Wetter Sanchez, Playfair Capital) and it seems that healthtech, remote work, gaming, fintech and e-commerce startups might even stand to benefit. Oli from Fuel Ventures said that whilst they’re being “a little hesitant” on traveltech, they’re “expecting an opportunity in that space in the coming months so [are] keeping an eye on it.” It’s hard to imagine a world without travel, events or snazzy e-scooters, so we’re also optimistic that these industries will bounce back.
So, it seems that most VCs are technically open for business (great news for founders!), but understandably are being more diligent on any incoming dealflow, and are prioritising their portfolio companies. For most VCs we spoke to, a lack of funds or desire to invest is not the issue — it’s mostly the lack of time and uncertainty regarding what the future looks like. For any startups out there who are looking to raise: do your due diligence, clearly outline why you’re a good fit for the fund’s investment thesis, and be sure to explain what you are doing in light of coronavirus and the risks you’ve been exposed to, to give your company the best chance of surviving over the next few months.
A big thanks to all the investors who took the time to share their thoughts for this article! If you’re a VC and are interested in being involved in the Investor Program, please reach out to me for more info.
If you’re a startup looking for support, guidance and mentorship, take a look at our new Startup Program membership options, which offers opportunities for direct introductions to investors. Or, read our partner piece to this article: From the Founders — These are the Most Useful Things Investors Have Done for Founders in Our Startup Program
