When the spread of the coronavirus was declared a ‘pandemic’ by the world health organisation a few weeks ago, at EU-Startups we saw a slowing down of funding news which lasted about two weeks.
However things have started to pick up again, with healthtech and medtech startups announcing the first rounds of funding closed, followed by other responsive services like online supermarkets. Almost a month later, we are receiving an influx of funding announcements that demonstrates that activity is gaining traction.
That said, many startups are understandably anxious that the pandemic’s crosscutting impact across many sectors will have given private investors cold feet when it comes to closing new deals. To get a hold on the current situation and find out what private investors predict for the coming months, we asked their honest opinion.
A slowing down of deals
As expected, many venture capital firms are leaning towards a continued slowing down of activity. Whilst they are still on the lookout for interesting startups, they’re reducing the number of new investments, and intend to maintain this ‘new normal’ for the coming months. As stated by Sander Vonk, Managing Partner at Volta Ventures: “At Volta Ventures we expect a steep decline in the number of deals in Q2 with careful recovery in Q3 and Q4 2020 depending on the duration of the financial impact of the new coronavirus.” This sentiment is echoed by Romain Lavault, of Partech: “Most startups should expect a “new normal” with fewer rounds, more syndicated deals and probably more caution on valuations”.
When considering round size, the consensus is that early-stage startups looking for pre-seed or seed funding are currently the worst hit group. Rob Moffat, Partner, Balderton Capital, commented: “The VC funding market is definitely open. However, seed-stage or slightly less exciting companies are struggling to put rounds together at any valuation. My biggest concern over the next six months is around pre-seed and seed funding.” Startup Funding Club, who are one of most active seed investors in the UK, agree: “Progress will be slow until we see confidence return and stock markets settle across Europe.” It is expected that pre-seed funds, angel investors and relevant government funding, if it’s available to startups at all, will have a role to play here in filling in the gap.
In all rounds, though, venture capital firms are reporting coming up against cancellations, with deals taking longer to complete, as signalled by Max Bautin, Managing Partner of IQ Capital: “While we are continuing to expand our team, it does take longer than usual for new investments to be completed”.
Despite all this rather pessimistic feedback, it’s not all doom and gloom. Certain venture capital firms are powering on through and actively looking for their next portfolio addition. As signalled by Oliver Richards, Partner at MMC Ventures: “Great entrepreneurs building great businesses will continue to raise capital to grow throughout the pandemic and after it”.
The question is, what are these firms looking for right now, and what can you do to maximise your chances of sealing the deal?
Are you hiding from the storm or riding it?
When it comes to presenting your business to a venture capital fund, it’s essential that you address the current crisis, and how your startup has pivoted, adjusted and re-mapped its growth strategy. Venture capital firms are keen to see a full-throttle approach, as opposed to avoidance tactics on behalf of the startups. As explained by Stan Laurent, Partner of Highland Europe: “Founders will need to explain very clearly how they’re responding to the new environment.”
Echoing this sentiment, Matthew De Jesus, Principal of Talis Capital, said: “Founders need to be thinking about how they can capitalise on this market shift. We want to see founders really testing their business plan, acknowledging where there has been an integral shift in their market, alongside a strategy that reflects this. Market reports suggest that there’s still plenty of dry powder for investment in the venture industry, and to deploy it what we want to know is: are you just in maintenance/survival mode, or are you in survive and thrive mode?”.
In other words, when preparing your materials to present, make sure that you include a well-detailed plan that considers multiple scenarios and outcomes as the crisis progresses over the coming weeks and months. “For startups looking to raise in this landscape, having a strong product demo and a well thought through plan for growth during a downturn will be crucial to the funds and investors that remain active”, said Oliver Richards, Partner at MMC Ventures.
If it’s somewhat difficult to demonstrate that your pivoted strategy is gaining traction, instead focus on past achievements that illustrate your strength. Ashley Lundström, Deal Partner at EQT Ventures, commented: “Founders should concentrate on building a strong fundraising narrative around inflection points recently achieved as it will be less challenging to ask investors to take leaps of faith around past inflection points rather than pending ones”.
Support for existing portfolios
With novel risk-taking on hold, many firms plan to support their existing portfolios, and accept only a limited number of new investments. As explained by Max Bautin, Managing Partner, IQ Capital: “We are investing a lot of effort into our existing portfolio, to help address today’s challenges and opportunities”.
With this in mind, if you’ve already closed a round with a prominent venture capital firm and can demonstrate that you’re successfully pivoting and tackling the current pandemic, now could be the right time to revisit those existing investor relationships.
Good news for impact ventures
Over the past few weeks, the world has been turning its attention to innovations with impact. From hackathons that offer solutions to the crisis, to startups pivoting to offer new helpful services, it’s ‘just’ about revenue anymore. The perceived value of startups with a social or environmental impact is rising, potentially meaning a new dawn of recognition for social enterprises.
Orson Stadler, Senior Principal at Mustard Seed Maze, commented: “Mustard Seed MAZE thinks the winners in this environment will be concentrated amongst those businesses that are working to address the social and environmental issues that this crisis has highlighted.”
Similarly, 4impact’s co-founder Pauline Wink goes on: “At 4impact, we are at the beginning of our fund’s investment period, which is a benefit in this difficult environment. We have a small existing portfolio and capital available to deploy. We are therefore actively engaging with startups for investment opportunities.” With this in mind, if you are running a social impact startup, that is Series A or above, this could be your time to approach venture capital funds with an impact focus.
Even if your startup doesn’t have social or environmental impact built into its structure, there’s also a wide appreciation for continued innovation that doesn’t stop, no matter the circumstances. “Even in these uncertain times, there are visionaries in Europe doing groundbreaking, fundamental work and this is not the time to be scaling back on innovation. Some of the best ideas and opportunities come in times of crisis and dislocation”, said founder Ophelia Brown, while talking about Blossom Capital’s new fund ‘Cultivate’.
Some venture capital firms are even going so far as to highlight specific ‘trends’ that have come up (and will continue to develop) in a post-coronavirus world. From the future of work, to online health, if you’re working in one of these sectors that has seen a boost, you could be in. As explained by Tomasz Swieboda, Partner of Inovo, “Many funds say they are open to new business these days and they will talk to you, but only a small part will actually decide to invest unless you’re a clear beneficiary of the current trends.” One of these such funds is one recently launched by Partech, which has highlighted 6 verticals for the “new normal” world.
With all this in mind, many venture capital funds are aware that while they are certainly ‘open for business’, now may not be the right time for many startups (depending on their size and sector) to look for funding. Instead, they have offered some nuggets of advice on how to knuckle down and get ready for the final Q4 of 2020 and Q1-Q2 of 2021.
“The key thing startups need to keep an eye on is cash and conserve it like gold dust, as it really is king, whilst also keeping salaries low, putting a freeze on hiring, and no office expenditure if you can . But, it’s important not to go so far that it demotivates the founders/staff which is where momentum in any startup can be lost”, says Stephen Page, CEO, Startup Funding Club.
“Broadly, we recommend for founders to focus on preserving cash as much as possible, and take the time to really focus on projects that were perhaps de-prioritised in their previous busy day-to-day, such as branding projects, improvements of conversion funnel, onboarding of supply and product development. Now, they have time to tackle these tasks to come back even stronger”, said Matthew De Jesus, Principal, Talis Capital.