Are investors looking to invest during lockdown?
Being the founder of a business right now is tough – especially for those looking to kick off funding rounds. COVID-19 is affecting production and consumption in huge ways and the global economic outcome has implications for us all.
Raising money is no mean feat in a healthy economy, let alone one where there’s massive market uncertainty, and you may feel like the whole thing is a little hopeless. But don’t despair, there’s certainly still appetite for investing in innovative businesses out there.
Of course, investors will be more cautious. Their focus will be even sharper on cash flow, supply chains and on you as a leader – in particular how you’re adapting to the current global pandemic and market uncertainty. Here’s what you need to know (and prove) to get the most out of your next funding round.
March and April saw a significant drop in funding deals but not everything hit a standstill. Seed stage investments took the biggest hit, falling by 83% between 23 March and 17 April compared to the same period last year. Businesses raising for the first time have the most to prove, so it’s understandable that investors are wary. However, the picture is more nuanced across the board. UK tech startups in general saw a 50% funding drop, indicating that later stage funding is not being as dramatically affected.
Investors certainly have a reduced risk-appetite but this might also suggest VCs are more sceptical of founders they’ve only met virtually and don’t have a pre-existing relationship with. Entrepreneurs may also be holding off starting their ventures until after lockdown. And since many deals are announced alongside a product launch, which may be postponed for now, it’s hard to see the full picture.
While there are funds looking to invest – good businesses will always find funding – the processes may take longer. Due diligence will need to be ramped up as investors seek out safer bets, so prepare for delays and increased scrutiny.
Venture Capital (VC) funds and the like aren’t struggling for cash and are planning long-term. Last Thursday, New Vector, which is developing a decentralised communication platform which includes a rival to Slack, announced that they’d raised over $4 million in Series A funding. The deals that have gone through in the past month reflect current demand in the market, but they’re absolutely still happening.
Moreover, leading global talent investor, Entrepreneur First, announced new hires at a senior level. This isn’t an industry that’s going to dry up overnight!
So investors have cash but right now it can’t all go on new enterprises. The needs of their existing portfolio companies come first as they manage who’s able to weather the current storm.
Most funds reserve around 50% of their money for follow-on investing, so this is definitely a time to revisit existing investor relationships. If your business is attractive, it’s worth your investors doubling down on their capital.
However, budgets are likely to shift towards finding new opportunities in the coming weeks and months. As restrictions are starting to be lifted and a semblance of reality returns, investors are now turning outwards.
When there’s greater economic and social uncertainty, investors act more cautiously and diligently. They’re looking for safer bets. COVID-19 has accelerated existing trends of disruption and put a huge emphasis on digital technology, making disruptive companies more attractive than ever. This means sectors like Healthtech, Fintech, online marketplaces and enterprise software are attracting the most attention. The government is doing their part to encourage investment in these innovative businesses through support schemes like The Future Fund.
Last year most VC money went into Fintech, automation and insurance, and VCs are certainly still attracted by these in the long-term. With the current shifts in behaviour on the part of both people and businesses, we’re likely to see digitisation accelerate.
It’s already clear that businesses focused around digital solutions and cloud sharing platforms are getting through funding rounds successfully. If your business is focused in these areas, or has pivoted to fit new customer habits and requirements, you’re likely to fall under investor interest.
Investor diligence will focus more keenly on the operational side of potential investments than ever. They’ll be looking closely at how stable or flexible your supply chain is, what anticipated demand is like and how your management team has been able to react in these turbulent times.
As operational costs increase due to social distancing, investors want to see the positive ways you’ve performed under significant pressure. They’ll be looking at the workforce management practices you’ve put in place and how you’ve managed to adapt to changing demand. Showing strong leadership is more important than ever when it comes to fundraising.
Make sure you stress test your business to show how it can cope in more extreme circumstances. This crisis has created situations beyond any business’ financial and operational forecasts. Now more than ever investors will reward businesses that are adaptable to change and are rigorous in their scenario planning. Take this time to really understand your strengths and make sure they’re visible.
Prepare for heightened focus on your liquidity and, importantly, your financing arrangements. Do you have working capital facilities in place or other access to cash? If your business model is asset-light and you’ve usually got strong recurring revenues, you’ll be in a stronger position. Profitability will be more attractive than fast growth potential: show your resilience.
You’ve heard it before but it’s more true now than ever: ‘good ideas don’t always make good businesses’. Having a clear strategy in place and showing your capacity to pivot is critical in a more competitive arena. Businesses that have been able to prove they’ve got strong practices in place for their colleagues and clients will come out of this looking very attractive.
This is a really tough question at the moment. Given the travel restrictions in place globally and various national lockdown measures, we’ve seen conferences postponed and face-to-face meetings completely out of the question. Meeting in person is a huge part of how investor relationships are formed, so much of your funding will probably go through existing investors or connections.
We’ve written about networking during lockdown if you’re looking to branch out, and many of these principles apply for appealing to investors. Your digital footprint needs to be as attractive as possible to unknown potential investors. Keep a close eye on your online output and make the most of this digital environment and the freedoms it allows when considering who or where to pitch. Take advantage of being able to be anywhere in the world from your own living room.
There’s been a lot of talk about Monzo’s recent funding round valuation crashing down by 40%. However, while some valuations may decrease, this isn’t likely to be too dramatic across the board. Specific and isolated sectors like hospitality and leisure or travel and tourism will see the greatest change.
The premium now is on business stability and resilience. If you have the precedent to back this up and a clear strategy of how your business model is adapting to the post-corona world, it’s not worth worrying too much about.
Good companies attract appetite from multiple pools of capital. As this year has been so disruptive, investors will most likely be looking on a pro forma adjusted basis to discount the effect of coronavirus from your bottom line. For top companies that have shown resilience against the impact of the pandemic and displayed very defensive characteristics, there could in fact be more interest, leading to higher valuation. In many respects, valuation is a product of demand.
Liquidity and cash reserves or debt capital will be used more in post-crisis valuations than revenue growth or expansion. More than ever, cash really is king.
Crises breed caution among investors. Their approach will undoubtedly be more disciplined, so business owners are going to have to articulate their story in the best way possible.
Despite COVID-19’s abrupt and unpredictable effects, the current environment is in many ways a great testing ground to display your reliability and strength. Showing that you’re keeping pace with a rapidly changing world and focusing on your customers is crucial right now. Investors know that crises produce effective disruptors, so don’t scale back on innovation.
Use this time to conserve cash where possible and access government funding if you need it. The slowdown of business will accelerate cash burn and dampen its generation, but government schemes such as the CBILS, BBLS and Future Fund are there to help. We hope the latter will be expanded in size and scope to deliver positive early results.
If you can access these schemes, it might be worth waiting until you’re more stable before starting up another funding round, especially while lockdown and travel restrictions are in place.
If you’re worried about the effects of the current economic climate on your business, head to our COVID-19 Impact Support Hub for more information and advice to help you through.