Founders want to keep their fingers on the pulse of what is happening in the market and what is on the mind of investors right now. So we gathered some of our favorite fellow investors for their insight and practical tips on what founders should be thinking about in this new normal.
Arif Janmohamed, General Partner, Lightspeed Venture Partners
Victoria Treyger, General Partner and Managing Director, Felicis Ventures
Chris Farmer, CEO and Managing Director, SingalFire
Moderator: Shuly Galili, Founding Partner, UpWest
The following are key topics we covered in our conversation:
Q: What happens operationally at a VC when COVID19 hits in March?
A: Chris: “We immediately flipped into “wartime mode” and had the finance team stack rank the portfolio companies based on the runway they had so we could begin outreach to those companies”.
“we triaged the portfolio to figure out which companies needed the most immediate assistance. We tried to find ways to do inside rounds or notes so the portfolio could have enough runway to operate.
“Tried to overlay a lens of what sectors are going to be most negatively impacted as well”.
“Now as we move into future planning, we want to be part of the solution”
Q: What is your advice to founders who want/need to fundraise right now? When is the right time and how would you approach it?
A: Arif: “The advice I’d give is to not be rushed. It’s harder to get to know investors because we can’t go for lunch or dinner — so anticipate creating the connection will take longer since it will all happen over Zoom. How do you build trust professionally and personally when you can’t have face to face time. There has to be mutual trust. Times to close will elongate”.
Q: Have you seen any change in the way you source deals?
A: Victoria: “One of the things that was very important to those Zoom deals is having strong relationships and came via warm introductions. So you need a couple different entry points and relationships to your desired investor. Referrals matter more now.”
“Investors are looking for revenue-efficient businesses, meaning your traction is ahead of what you’ve spent. How much runway do you have? 24 months is the new 12. You need a path to breakeven. Sector-wise, we’re looking for people who are thinking about critical-use sectors. If you’re not in one of those sectors, how do you pivot to get more aligned with those?”
Q: Do you anticipate terms changing for early-stage deals? What should founder expectations be in terms of valuations and size of the deals?
A: Chris: “As it applies to terms, it’s not homogenous. There are certain companies that will benefit from tailwinds in this market. And vice versa. So valuations will be radically different. Anything around wellness, telehealth, WFH, bottom up sales models, etc. will all benefit. Enterprise sales models that will be more than top-down, though not directly impacted, will see valuations discounted accordingly.”
Q: What areas do we see growth opportunities?
A: Arif: In the enterprise software: What we are excited about is the first derivative of WFH. Companies that were waiting for chat to take off are going to finally have their moment. Chat is expected to be a part of the way teams collaborate. Distributed teams accelerates new types of security. Cloud-based VPN for example. Netskope and CyCognito are companies that will likely benefit from this cycle.
Cloud + data + machine learning to build new types of enterprise software that is more contextual than rule-based. Probability based software that is tailored to users.
Victoria: “Excited about healthtech like telemedicine obviously, but more transparency around healthcare treatment spending. Consumerization of healthcare that is helping consumers take control of their health spending. Others help enterprises working with care providers to make that process much more efficient and transparent. Mental health transparency is another big one where we’ll see a lot of innovation.”
Fintech infrastructure: “We’re seeing a tidal wave to push banks and insurance companies toward digital adoption faster than they would normally because of COVID. Data companies that help with expense management, AP management — anything that touches the office of the CFO”.
Chris: “Edtech and gaming were out of favor the last 5–10 years, but that is really turning around because of COVID. COVID will come in rolling waves until we have a vaccine — so the college and university experience is going to be severely impacted — not just K-12. It’s a great time to have a digital classroom. Professional training, safety, professional retraining, etc. will all give rise to edtech”.
Not excited about: on-premise hardware. Anything that has long sales and testing cycles, lots of human interaction. Heavy enterprise sales processes are things we’ll be very cautious of going forward.
Q: What is your advice to global founders selling into the US market in terms of their overall go to market model?
Arif : “Innovate around how you meet your buyer and let them play with your product and then converting them to purchase is going to be critical. Whose life do you make easier? Sell to people to make lives easier — you’re not trying to optimize the highest price, you’re trying to remove as much friction as possible. People haven’t stopped buying — Q1 was still pretty stable on enterprise.”
Chris: “This should be a great time for global startups. You have to figure out how to sell in this new environment and interact with customers digitally from start to finish. The old way might not ever come back. This new Zoom paradigm makes things at least 90% if not more, efficient. You can meet more people quickly. Land and expand — a lot more freemium, bottom up selling and then let the product sell itself.”