Impact on Fundraising and How Your Startup Can Buck the Trend
It used to be that banks avoided start-ups, considered them risky businesses they had no appetite for while investors welcomed every adventurous yet worthwhile start-up idea. Coronavirus has created an unlikely plot twist, as banks are made to bail out small to medium-sized businesses and investors are shying away from the wide-eyed entrepreneurs with the next big start-up ambition.
In the first week of March, Sequoia Capital called Coronavirus a Black Swan and published a memo to Founders and CEOs, urging them to prepare for a difficult and unpredictable scenario ahead but also rise to the challenge like Cisco, Google, PayPal, Airbnb who grew in spite of financial crises. They were told to question their cash runway, expect fundraising slowdown, reconsider marketing ROI, capital spending, and coldly enough, decrease the headcount. A few weeks later, Nassim Nicholas Taleb, scholar, former risk trader and author of 2007’s ‘The Black Swan’ refuted Sequoia’s claim. He called COVID-19 a white swan event and said it was preventable, adding that smart investors who saw this coming (in December 2019), already created comfortable buffers and contingencies so that funding runs smoothly but COVID-19 minimalists who took no conscious decisions are now cashing out to be liquid or seeking bank bailouts. Swan debate aside, there’s no denying the global economic stage is likely headed for a recession.
What can start-ups do to beat the bleak? Is this the last hurrah for some? Should start-ups engage in the brutality of Economic Darwinism that will result in the survival of the fittest organization even if it entails laying off employees and bankruptcy for competition? Or is the panic all blown out of proportion?
Taking the mixed bag approach
VCs have generally agreed upon one sentiment amidst the Coronavirus outbreak – proceed with the investment, but with extra caution than before.
The start-up-investor dynamic will run like a tight ship that may be slower or faster than before depending on what stage of funding your company is in and what segment it serves. Sectors like travel, leisure, hospitality are obviously not doing so well given the current scenario.
Early-stage start-ups woes
Early-stage start-ups are not at unprecedented risk currently if they’ve not begun seed funding. If you’ve secured smaller pre-seed/ seed funding, and are not market-ready, you could approach investors for Series Funding at a more secure time while strengthening your value proposition model because those who are investing smartly are now looking for a solid game plan with longevity more than before.
Even at a seed stage, cash conservation is deemed extremely vital, especially if you’ve invested your own savings, hired employees, or if you have a supply chain. Viable options for emergency fundraising here are personal savings, borrowing from friends/family, small bank loans, crowdfunding, microfinancing, or seeking small ticket top-up funding from angel investors/current investors just so you can stay afloat. WSJ estimates that seed-stage funding capital has declined by 22% since January globally. Most investors still insist on meeting founders personally at least at the seed stage before making any commitments, the likelihood of which is less as of now. But it is business as usual for many investors so video pitches are gaining traction.
Stock market factor
VCs function with Limited Partners whose skin is mostly in the listed market game (rarely in cash, unless a willing Angel Investor was funding you). So with the global stock market fall, start-ups who have already launched and are seeking further funding will have to bear the brunt, at least for the next 3-4 months (unless they have unicorn-like KPIs or pandemic-proof usefulness such as food/medicine delivery services, which may attract investors looking for quick and risk-free returns).
Some funders are blocking already committed series funding for start-ups to ensure capital conservation. Big cuts are expected in valuations as some investors are keen to buy for less and sell for more, especially because other investors are backing out or taking time to do due diligence. There are fewer FOMO rounds as the real fear that drives investors currently is the capital meltdown. Yet experts predict that those who have a lot of dry powder will go on investing in profitable ventures as usual. If your business idea is founded in solid, unshakeable grounds with a sound expansion strategy and undeniable longevity, you’re probably going to do just fine.
Practical fundraising tools
Here are some best fundraising practices during COVID-19, whether you’re pitching to VCs, business incubators, or angel investors:
- Show how you’d manage wisely your runway by ideally keeping 12-18 months provision that you can extend by strict cost-cutting.
- Proactively assess risk factors that may lead to a higher need for funds, e.g. disturbance in the supply chain, reduced receivable payments, consumer discounts, etc.
- Demonstrate the strength of the company’s character by giving pay cuts instead of layoffs. More investors value conscientiousness than you think.
- Adapt your overall plan to align with the macroenvironment with a solid Business Continuity Plan before approaching investors.
- Have a thorough WFH policy (that ensures the same results as working from the office) to gain investor trust.
- Create an assured growth path by employing innovative techniques for customer retention that can circumvent the pandemic or other disasters.
- Present in no uncertain terms the latent demand (and future scalability) for your product/service that is bound to re-emerge or soar once the pandemic is over.
- Don’t compromise on your series funding pitch deck just because ordinarily, available help may be missing. Find the most impressive way to display avant-garde insights on the deck and demonstrate resourcefulness in times of scarcity.
- Time is of the essence even if it’s a video pitch that investors are attending at home. Speed up rather than droning on.
- You might want to step away from playing to the VC’s FOMO-FOLS mindset and focus on the actual necessity of the product. Investors know every trick and manipulation in the book by now. Try a hardcore, honest yet serious approach so that the investor doesn’t once question looking stupid if he invests and doesn’t feel manipulated into succumbing to fear tactics. The world is in the constant state of COVID fear as it is.
If you’re stretched for funds and don’t have the bandwidth to hire new talent, consider outsourcing some essential services to consultants/experts who can get the job done with the utmost professionalism, collaboration, and scalable solutions. West Agile Labs is a global digital product agency specializing in consulting, design, and mobile/ web development/ enterprise application development with advanced capabilities in business analysis, infrastructure services, and DevOps.
Flexibility will be your biggest ally in times of COVID-19. Most of all, stay positive and committed. You didn’t come this far only to be turned away by a virus.