Fundraising in challenging times – the journey from angel to series APosted 22 Apr 2020
The world will be changed by the pandemic in ways we cannot yet explain. That is the resounding message from a recent investment forum held by Digital Catapult and led by Peter Cowley, president of EBAN (European Business Angels Network) and serial entrepreneur and angel investor, Carmen Alfonso Rico, partner at Samaipata VC, a European seed investment fund and Ed Lascelles, partner at Albion VC, a series A investment fund. It’s clear that even for these experts, it is still very hard to predict the full impact that the COVID-19 outbreak will have on the economy. While investment will continue, it will be at a different pace, in shifted sectors and in a new landscape.
The big question is how unrecognisable will that investment landscape be? What will options for growth look like for the most promising of startups in this new environment? Things will never quite go back to how they were, but times of change present new opportunities – new problems that need innovative solutions. During the last recession, great companies were founded; AirBnB, Uber and Netflix. Did the credit crunch that spawned them determine something of their nature? Will the high-growth companies arising out of the COVID-19 crisis demonstrate similar unicorn potential or will the very nature of the pandemic influence the business culture of what follows?
For now many investment funds will urge cash conservation and look to protect existing portfolio companies from the worst ravishes of the downturn. We need to begin planning now for recovery and to stimulate new businesses in high growth areas. Digital Catapult has welcomed the Government’s announcement of a new £750m fund to be managed by InnovateUK to support innovative businesses in R&D as well as an additional £250m provision through the British Business Bank to support the UK’s startup and scaleup ecosystem. This contribution will offer much sought after support to many of the UK’s fastest growing businesses. But perhaps most important in this, is the implicit recognition of the significance of innovation and technological creativity as key elements to accelerating growth and aiding recovery.
In times of economic duress, traditional businesses draw in their horns and become more conservative, yet this is exactly the time when innovation becomes most important. New times require new methods and new solutions. We need a new generation of phoenix companies to rise up and resume the momentum of the UK’s startup and scaleup communities. They will be the ones who will kickstart the economy and accelerate us rapidly down the road in new and exciting directions. We need the investment community to maintain its confidence too and with the help of government and local authorities, help those companies to help us all.
Read on for some of the key takeaways from Digital Catapult’s investor forum:
In the seminar, Peter Cowley reminded participants that “Investors at an early stage don’t invest in businesses, but in people”. This is promising for those investment-worthy individuals leading companies but of course working remotely and not being able to meet people in person, but over online tools like ZOOM, is another reason why fundraising under these circumstances can be different. Clearly when investors, such as Peter, outline specific requirements for investors to ensure they meet prior to making contact, relationship building becomes more efficient. Peter goes on to remind that patience and persistence when fundraising are needed now more than ever, so focusing on building relationships with investors, and focusing efforts on the most relevant ones is sensible.
For those already with investment, Carmen Rico rightly points out that early stage VCs are working to support their portfolio companies operationally – potentially guiding on new strategies and providing cash injections – at this critical time. Rico also points out that due to the level of uncertainty in the stock market and around the outbreak itself it is very hard for the investors to price risk, which makes it very difficult to forecast startup valuations at the moment. Adapting to the new circumstances will take time, but in the long term investors do have the capital to invest, so once uncertainty levels decrease we should start seeing more rounds coming through.
Commenting further, Ed Lascelles says, “You can see this huge volatility in behaviour” which affects the whole investment landscape; some term-sheets are being pulled or companies are not even getting term-sheets. Lascelles’ advice for founders that need to fundraise is to wait for a few months if they can, when it will become a lot easier for investors to understand what they’re backing.
Guidance for founders, from investors, on how to adapt to the current landscape:
- “As a founder, do your best to extend the runway 18-24 months, and do it cutting growth/revenue forecasts aggressively. In unprecedented circumstances, with high levels of uncertainty, cash is King” says Rico. Taking an ultra conservative approach should be considered as there may be difficulties at a supply chain level and many other unexpected factors.
- If you don’t have to raise, don’t! If you do, close as quickly as possible, and don’t get stuck in the negotiation process. Pursue all avenues when it comes to access to finance.
- Employee wellbeing – ensure key talent, and those best placed to assist recovery, are receiving communications regularly, maintaining a feeling of belonging and commitment to the company.
- Replan – both short-term for the lockdown period, as well as the period afterwards.
- Survival – this year is about resilience, in terms of growth, fundraising and valuation. Be ruthless with forecasts: “assume no growth, no new customers, that your churn doubles” says Lascelles. In the meantime optimise products and focus on new updates.
- Adapt to changing requirements and proactively look for new opportunities, from new markets to other industries in which a product could be useful.
We’re coming from a time of unprecedented high valuation. That era will likely change, and valuations reduce. The upside is that it will hopefully lead to a time where founders will receive fair valuations and focus on being sustainable businesses.
Rico says that investors are still open for business, “In the short-term, investors will be slower and the bar will be higher because uncertainty is too high right now and we also need to redefine the process to build confidence over video. But this is a very short-term problem. In the medium to long-term, we invest in five to ten year time horizons and have money to deploy, so investor appetite will come back and we will all go back to chasing deals.”
To listen to the full conversation, click here.