Startups and corona part 2: Who is your go-to investor right now?
We are reading a lot about different views from investors how the ongoing global crisis is impacting to startup companies’ ability to keep their wheels spinning. Most common tips seem to be making a reality check on your sales pipeline, taking extra care of your customers, embracing cost-consciousness, facing the hard decisions sooner than later and increasing investor transparency. All this has one simple goal: securing your runway over the crisis and a recovery period after that.
Last week we wrote about tips how to approach investors when you have to do it remotely (accompanied with list of links to other topical resources). This post helps you pick whom to approach.
No-one knows how long this will last and what will be the consequences to the economy. It naturally also depends on multiple things, one of the most critical being your industry. Nevertheless, it seems that 2020 will be a tough year for everyone. This means that no less than 9 months runway will be necessary since it may only get harder towards the end of the year to fix the situation. In fact, I’d suggest looking to make the moves to aim for 12–18 months comfortability, if possible.
Once you’ve reviewed your burn rate and updated the cash flow projections to match the worst-case scenario, you might figure that there’s a need for some additional funding unless you just raised a round a short while ago. So, who is your best friend right now?
As always, talk with your existing investors in case you happen to be lucky enough to have some. It is in their best interest to secure your future and they’ll try to help you if they can. They’ll most likely also spin their rolodex to hook you up with some other potential investors. For the ones raising their first rounds you just need to do the ordinary hustle. While some investors are shifting their focus now to other directions, some maintain more of a business-as-usual approach — and perhaps even see an opportunity to stand out. A few rules of thumb depending on your situation:
1. VCs with mature funds are likely to focus on supporting their existing portfolio
It is expected that VCs with mature funds will allocate more of their remaining reserves to bridge financing and completing open follow-up rounds instead of growing the portfolio with a few more companies. They may also need to support some of their portfolio companies with more money than anticipated due to other investors’ need to retreat the deals.
2. New VCs and VCs with new funds are still building their portfolios
Especially the new investors on the block are seeing their window of opportunity. There has been some oversupply of funding, especially for early-stage rounds, for some years already. There has been more competition to get into the best deals. Now, these uncertain times might in fact improve the situation for the active investors. Especially startups planning to raise their first VC round should spend some time to identify these funds.
3. How about Corporate Venture Capital?
Basically, both of the previous points apply, but there’s a couple of more things to consider when you’re looking after funding from corporations investing in startups. For the CVCs, the situation depends a lot on their industry. If the whole industry is spiraling down, it may be so that the corporates in those industries will start playing it safe for the main business. Especially if the CVC activity is not a crucial element in their corporate strategy. Also, the level of industry-specific support and insight which can be obtained only by working with CVCs may become lower if the business and technical support resources are being allocated to other activities.
However, if the CVC activity is seen central in the corporate strategy, and especially in industries which are impacted less by the turmoil, there’s still good comfort to keep on investing in startups that are always considered as posing high level of uncertainty. We see industries like healthcare, medtech, energy and utilities, telecommunications, e-commerce and some others not taking a hit like most of the other — some of the industries are, on the contrary, swimming upstream.
And as usual, an exception to all this are the bold visionaries, those who are able to keep the viewfinder aimed further into the future. The ones who see the opportunity to invest in startups today, that may have a substantial positive impact in the form of competitive advantage for the main business once the industry starts to recover. As National Grid’s Pradeep Tagare said on PitchBook’s recent blog post “This is a time when we'll separate serious corporate investors from what are referred to as tourist CVCs”.
While these can be considered as a few simple pointers to help you navigate your way over this period, there are of course a lot of exceptions. For example, some of the most appreciated investors have picked a counter-cyclical strategy: they’ve been very much on their toes during the recent years of unparalleled growth and are stepping in now.
While for founders the good news seem to be that there’s still going to be good money on the table and it may be available on good terms, we can’t escape the fact that some companies will go down and jobs will be lost more than what we’ve used to see during the last years. Even so, the pandemic creates a great amount of new opportunities aligned with priorities that we may have learnt to ignore. It’s been delighting to see how swiftly companies, communities and individuals all over the world have responded to the situation — to not only to secure their own future but also the future of societies.
The author Joose Väinölä is part of the Helen Ventures business development team.