Q&A with Jeff Clavier, Founder and Managing Partner, Uncork Capital
We recently hosted a session with Jeff Clavier, founder and managing partner at Uncork Capital to discuss how COVID-19 is impacting seed stage fundraising for startups. Jeff drew on his previous experience investing and supporting early stage startups during the previous economic downturns, and shared his advice and perspective on how Seed funding will evolve in 2020 and beyond.
We have a recorded session or you can read a summary of our conversation:
Q: What is your take on what is happening in this downturn, how is it different than previous downturns?
Jeff Clavier: This is my third downturn. What is different this time from the downturns of 2000 and 2008 is it’s not a financial crisis (at least at the onset). This is a healthcare bubble. So we’re still trying to figure out what it all means. At Uncork, we immediately jumped into triage mode — how exposed is our portfolio? Which companies are most at risk for impact by COVID? We’ve seen companies move from millions in revenue one day to nothing the next, so we’ve been working to develop ways to extend runway for everyone.
We don’t know how long it will take to get back to a sense of normalcy for investment activity. For the 2000/2001 downturn, it didn’t really get back to normal until 2003/2004. In 2008, not until 2010. So two years of runway is a good target to have, but that is also an arbitrary number. We just don’t know how long it will take to get back.
It is really hard to raise capital right now. As investors, we are primarily focused on our portfolio and seeing how to help them the best we can. We are trying to impress our previous downturn experience upon them since many founders don’t know what this means.
Q: We’ve seen the active investors in the seed landscape balloon. So from a founder perspective, there should be a lot of money out there. How do you anticipate how that capital will be deployed?
Jeff: Back in 2000–2008 there were a dozen funds or so. Now it’s nearly 1,000 so that is a silver lining for founders. The thing you want to ask investors is “when was the last time you made a fresh investment in a company?” Not a bridge, extension, etc. but fresh capital in a new company. You need to get a sense of how active they are. You want to be as efficient as possible and figure out who are the funds that have their ducks in a row? Founders generally don’t do enough research ahead of time about which funds are going to be right for them in terms of size of check, domain fit, leading rounds or not, etc. Founders need to ask the right questions and do their homework to sift through the options. This will narrow the funnel and make your introductions much more effective. If someone says “we’re open for business” that doesn’t mean anything. Of course they’re open, but are they active?
The window for VCs to pay attention to new opportunities is narrowed because they are helping their own portfolios. So your intros need to be tight and relevant.
Q: Timing. What are the questions that founders need to ask themselves right now when it comes to when/if to raise?
Jeff: For our own founders, we look at their runway and see if they can wait. If they can, then we tell them they should. Everyone is focused on portfolio triage, so if we can avoid fundraising, we will. If they can’t wait, it’s all hands on deck and we will do everything we can to pre-qualify investors to see who is able to write a check and might be a fit. Many investors might say they will be looking for new opportunities to look in the next 3–6 months, but the problem is nobody knows what the window really is. The lack of face to face time makes it hard to establish trust in new founders. Understanding the founder dynamic is important and it’s hard to really understand that over Zoom.
Q: What if this never changes and this is the new normal and we have to pitch over Zoom?
Jeff: Intros become even more important. We need some kind of signal, someone in our network that does have face to face experience with this founder to have the trust required. LinkedIn and Crunchbase are your friends. Don’t text or call me. Do your homework and send an email with a short paragraph explaining what you do, a good subject line, and link to a deck or teaser deck. Explain who your connections/intros in common are. It doesn’t mean that we won’t make an investment off a cold email, but do everything you can to make your email as strong as possible. Use your contacts and figure out who can qualify you ahead of time.
Q: What about angels? Are we going to see them be more or less active?
Jeff: Depends. You should always try to think about investing at an even, consistent pace regardless of up or down times. When you have a plunge of the public markets like we’re seeing now and you see your portfolio take a dip, you might be tempted to start making a flurry of moves out of panic. So as a founder, you want to find an angel that has been through this before and has the experience to navigate uncertain times.
Q: Do you think the size of seed rounds will shrink? And will founders be able to raise on a Powerpoint like the last few years, or will you require more KPIs and proof points to invest?
Jeff: The things that matter still matter — product, track record of the team, and the market opportunity. It’s a risky environment with a lot of unknowns, so valuations and size of rounds will probably shrink a little bit, but valuations over the last year and a half or so were insane, so the market correction is probably ok. Pace will be a little slower too. But things are not going to shut down. As an investor if you raised capital, you should expect to deploy it. I think there is going to be tremendous pressure on the economy to reopen by June — but can we do it safely? The uncertainty will be there for a while so people will hold back on investing in new companies because they want to have reserves to help their portfolio companies if they need to extend runway over the next 6–12 months.
Q: What is your sense of the hardware market? Do you think this is a good or challenging time for them to fundraise?
Jeff: Consumer hardware is very hard. As one of the most active investors in that space, I’ve toned down my investment in that space — haven’t invested in consumer hardware in two years. One of the big reasons is it’s hard to find downstream investors who are willing to take the risk. It’s a highly capital inefficient sector so the enthusiasm for the space that was there last few years and basically evaporated. The road to Series A and B is very tough.
Industrial hardware is a little easier and that’s why we’ve been more focused there lately. We’re investing in hardware-enabled SaaS.
Q: What about other areas that you’re excited about?
Jeff: We’re trying to apply a COVID-filter across everything we do. Retail has been decimated, so we’re staying away from that going forward. Same with travel. So we are looking at investing must-haves like security and compliance. Anything that is “reinventing” old industries.
Q: Do you think AR or VR will make a comeback because of this?
Jeff: VR was doing really badly over the last few years and we’ve seen very hyped companies go down the drain. We’ll see if they get a boost because of this — the jury is still out.
Q: Any other final thoughts or advice to share? What about global founders thinking about entering the US markets.
Jeff: It’s actually good news. The one winner of all this is the notion that you can build a company anywhere. 10 years ago we said “everyone has to be in the same place.” But the tools have evolved to make distributed teams possible. It doesn’t make sense to try and build an engineering team in San Francisco when you are competing with Facebook, Uber, Google, etc. So flip the model and build your team pretty much anywhere, while keeping go-to-market in the US.
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