Fundraising in Turbulent Times: Key Takeaways
Sigma Software continues the series of free webinars during the pandemic aiming to inspire businesses to move forward and explore how “the new normal” has impacted various tech industries.
Experts from Sweden, the UK, Germany, and the USA joined the Fundraising in Uncertain Times webinar and shared their thoughts about how the investment landscape was affected by the crisis. Christian Kourtis, a Senior Manager in the EY Tech Law team, Jessica Rameau, Partner and Fund Manager at Wellstreet, Max Lautenschlaeger, a Co-Founder, Managing Director, and COO of Iconic Holding, Andrew Klein, a Managing Partner at Zccounting, and William Mercer, a Venture Director at Zag (moderator), covered the following topics:
- Types of investors that entrepreneurs should target at various stages
- Key approaches in evaluating potential investors
- Alternative options if fundraising efforts don’t meet expectations
- How the investment landscape has been accelerated by COVID-19
Will: Hello everyone, welcome to the panel.
I wanted to start with a question for Jess. Everyone’s saying that venture capital is closed, but Wellstreet made three investments since the start of a lockdown. Why did you do that?
Jessica: The investment processes can take two to three months. So, we just didn't interrupt what we were doing. One of the companies is within the FinTech space, so not necessarily related to the lockdown. And the other two are in the e-commerce space, which is very much within our investment strategy. We've always been very bullish about how we see the future in e-commerce. And the industry really accelerates during COVID-19. So, we've just carried on with those investments.
We had a couple of weeks in the beginning, making sure that we knew where all of our companies are, doing a risk assessment on them. But funds still have the cash to deploy, and we’ll still be resuming and making investments.
Will: Have you seen a decline in the number of startups coming through your doors? Or do you think that this rate of investment is going to continue?
Jessica: For us, it's going to continue just based on where we are in our cycle. We're seeing a lot of companies come in. The rate of referral has maybe increased. It might be a result of founders reaching out to their networks and the people close to them. We have a lot of stuff coming in from our network and from people who are close to us, probably even more so than before.
I meet five to ten new companies every week. All of that online. We’re trying to have the same level of activity remotely.
Will: You mentioned e-commerce, but are there other good areas to invest in right now? Where are you looking for future growth?
Jessica: Any company that's improving the competitiveness of an existing business, showing a way to dramatically increase revenue or profit margins, and a radical shift in terms of cutting costs. Any company that's digitizing a process that has been offline in specific areas, like the medical sector. These are companies that we've always been interested in.
I hope that sustainability solutions will start to get the attention and the traction they deserve as well.
Also, we are looking for companies that have a realistic view of the future and a plan to break even. Companies that can see profitability within their eyesight, still have global ambitions to scale, a stepped approach, and the product-market fit is a model that we've preferred. Because it means that you're investing in businesses that can ride out a period of six months of complete inertia.
Will: Andrew, you're in the spiritual home of venture capital. What’s the West Coast doing?
Andrew: Being in Seattle is unique because all the major tech companies are here. Microsoft, Amazon, Apple has an engineering office. Thus, everyone who has stock options become an angel investor.
The angel investing in Seattle has always been conservative. And we've noticed that investors are more willing to do remote visits. You don't have to fly to San Francisco anymore to meet with an investor. They are more likely to respond to a blind LinkedIn request for a meeting because they're sitting at home and still have to find companies. We're seeing that you can get a hold of an investor easier than you could have before.
In March and April, everything stopped. They were still fielding meeting, but there wasn't a lot of activity going on. Everyone was waiting. In June and July, we've seen people start to move on. Either through being fed up with being stuck at home or they've just accepted that some things have changed.
However, the check sizes have gotten a bit smaller. It’s also a lot harder to find employees.
Will: You're seeing reductions in check sizes, but successful fundraisers are getting up. We've heard rumors of 50% reductions across the board and valuations, is this true? Are we seeing a less bullish investment market?
Andrew: That's hard to say. Our clients that received funding during this period have not reduced their valuation. A lot of them went back to their existing investors and did a follow-on round to their prior round.
Typically, the client would’ve gone out and raised five or ten million. Today they're raising a million on a bridge note. So, I wouldn't say that the valuations are down. I just think that intermediary steps are being done.
Will: Max, you deal quite significantly in the crypto space. And everyone familiar with the crypto space often sees that sometimes it doesn't track what's happening in the real world. Have you seen any difference? How is investor sentiment there?
Max: Yes, the value track drivers of crypto are different. In the real world, we would use the discount cash flow method or other mathematical approaches. In the crypto world, that's a bit different.
Bitcoin is a commodity and it can be perfectly evaluated by using the stock to flow ratio. The value drivers of Ethereum are also different. It’s like an App Store. The more apps get to build on Ethereum, the more users it will attract on the other hand. The more users are getting attracted, the more developers would come to the platform as well.
I’ll give you one example and this is payments. If someone from Columbia works in the US and wants to send money back to Columbia, he or she shouldn't go to MoneyGram or Western Union because they just rip you off. They take 10% charge of all the money you are sending. This is where crypto is a really good use case as a payment system.
In the pandemic, everything that can be converted to cash was converted to cash: gold, stocks, derivatives, crypto. So, during the liquidity crisis, there was a strong correlation across all asset classes. But if you look at the performance afterward, COVID-19 was a good thing not only for digitalization but also for crypto assets in particular.
Will: Are you still investing in ventures that are using crypto technology within their value proposition? On a startup level is there a positive investor sentiment? Or are you going to be focused on the more commodified nature of crypto?
Max: It's not positive or negative. It's realistic. Because there was a time when everyone thought that blockchain was the solution for everything in any industry. And that was nonsense. It cannot solve problems just because you're using a decentralized system. In a lot of cases, a centralized system is a way better approach.
Supply chain space, data protection, the financial markets, this is where blockchain makes sense. The financial system is full of intermediaries. We don't need them to create trust. It works, but it’s inefficient.
You have to be very careful about what industry you choose. Just ask yourself if this is an industry where blockchain technology can really be a value add and where it can be disruptive.
Will: Christian, you’re a contributor and you're a part of EY’s crypto group. Just wondered whether you echo that sentiment?
Christian: Absolutely. Now less relative volatility in terms of Bitcoin prices allows the real development of applications on different types of chains.
Moving into a wider conversation about other parts of the market, we're especially seeing transactions that were on before COVID-19 continuing at the same valuation and at the same rate. But once those finished there's a bit of a lag between the new transactions coming on.
There is a real drive to get back out into the wider market and new transactions. Perhaps with a discount in terms of valuations or more downside protection in terms of legal protections.
Will: Max, people often forget that VCs have to raise investments themselves for their funds. And at Iconic you managed to raise the fund shortly before this all kicked off.
What was the thesis that got your LPs on board with the fund? And has that sentiment changed for LPs investing in VC funds post COVID-19 environment? Have you got any concerned investors needing their cash back?
Max: What we did was our own financing round. This is how we can deploy companies to startups and how we can also issue our own funds. At the same time, we also issued a crypto asset fund.
What COVID-19 showed us is that digitization is accelerating. A lot of companies are forced to digitize. This is why we were able to close our financing round at the moment. Since we’re working in the crypto and blockchain space this was very beneficial for us.
I believe that fundraising is going well when you have a warm lead. Because the final meeting before someone invests in you is the physical one. We can be as remote and as digital as we want, but at the end of the day, we have to sit down. If I do angel investments, I want to sit personally with you, discuss it, and get a feeling for what kind of person you are. This can't be digitized.
Will: Chris, you often deal on the later round on stage, and at the exit. You're doing the M&A, the transactions, and liquidity events for investors. Has that changed?
Christian: As COVID-19 hit, there was a pause or slowing down of most activities. The same thing happened at the private equity market, where you have any type of transaction with a larger fund. This often included bank debt or other leveraging. Banks and PE houses were very conservative because the check sizes are much greater than the venture and growth market stage.
But in the VC sector, we see a slowing down of some transactions. A lot of the bridge funding did come into play. VCs propping up their existing portfolio, making sure that they can get their portfolios out of this crisis to enable them to survive the inertia.
Will: What advice do you have for founders that are reaching out to VC funds now for investment? Have you got any tips for building rapport digitally?
Jessica: You have to remember that investors are been on calls the whole day. So, you need the energy to come through the screen. I’ve had some founders that haven't come on camera, which is sad. Go on camera, show your face and create that rapport. You can also share some little stories. Things like that really help.
Max: I agree. For me, the passion of the founding team is extremely valuable. I believe that a passionate team, with a good topic, can pivot ten times, but they will succeed sooner or later. And passion is something that you normally feel when you're face to face with people. If you have any creative approach to sending me this passion via email or via video call this will be extremely helpful. Storytelling is always part of it. Be creative in these extraordinary times.
Will: Andrew, Christian, you're the trusted advisors to the startups that you're working with. What advice do you have for those founders who are running out of cash? Do they focus on what they’re managing in cash they have on raising investment? Or are there other options available?
Andrew: First off knowing where you're at and where you can pull a ripcord, and slow down burn is absolutely necessary. Regardless of a crisis or not. All of our clients assessed what is essential and what is non-essential. There are still opportunities out there. I would expect it to take longer, so tighten your belt wherever you can.
Christian: In the short term, apply for the government assistance that you have in your jurisdiction. Other than going back to your existing investors, it's always important for founders and management teams to understand how COVID-19 has affected their position. This bleeds into the long term.
All businesses, regardless of whether there's COVID-19 around or not, should make sure their financial metrics are sound. That they can be presented in a way that is easy to an investor to understand. Legal and commercial contracts should also be organized well, to enable the due diligence process to be taken a lot quicker. The due diligence is one of the longest parts of the transactions. Unnecessary distraction for founders as they're trying to build that rapport with the investors.
Then thirdly, also getting to know your investor ecosystem. Not firing emails to everybody. Just spending your time wisely. The longer you can develop your relationship with your VC the better. That makes sense also for your exit as well. You should be doing all those at the same time, figuring out where your weak spots are. Small changes over a longer period make a lot of sense.
Will: Talking about an investor ecosystem, are there any concrete relationship-building tools or advice that you have for founders? Are there things that a founder can do to be more strategic when approaching investors in this climate?
Christian: There are lists on the internet where VCs invest predominantly and where their check size is. Think about how VC is going to help you on your journey and how this is going to map out across your relationship. Because it's not a short-term relationship. They’re on your cap table permanently until you or they exit.
Jessica: Some companies just tend to add me to their newsletter. It allows you to track the company's metrics over potentially six months before you actually do an investment. They update you on their news and you can see them progress. I really recommend it.
Will: What if fundraising efforts don't result in an investment? What are the alternative options are?
Andrew: The best way to start a company is to bootstrap the company and to finance through customer revenue. If you can get customers to pay you for something that they want so badly, then the investors will be throwing money at you.
Will: Jess, so you mentioned that the kind of businesses you're looking for has changed as a result of COVID-19. Have there been any hard changes in your criteria and as a result of the pandemic?
Jessica: I don't think so. Founders need to be aware of how COVID-19 has affected them both in the short term and in the long term. Every founder should make explicit what has happened to their business during the crisis.
Investors are still investing in founders. So, we want to know what founders actually did during this period. How did they grasp this incredible challenge that has faced so many companies and turned it into a fantastic opportunity? That is a huge advantage if you're able to explain what you did and how resilient you are, even just as a person, even if potentially you didn’t succeed as a business.
Christian: The whole messaging around how you've responded to COVID-19 is something that is going to be a part of your story for the foreseeable future. Even if the pandemic hit you particularly badly, you need to be able to articulate, why the investor should still have faith in you.
Will: What is the best way to pitch for pre-seed funding? What do you have to show right now to get your attention?
Jessica: The definition of “seed” very much varies. But let's talk about a pre-prototypal or prototype stage. The earlier we go, the more we're looking for experienced founders. Those who have spent a lot of time experiencing the problem or working within the target customer. You need to be able to show the actual grasp of the problem you're trying to solve. It doesn't matter if there's no prototype. Just show your depth of understanding of what it is you're trying to solve. Then I would focus on what is the size of that opportunity. How can this actually affect the bottom line of the client and make a difference from a financial perspective?
Andrew: The fastest way to get an investment is to graduate with a computer science degree from Stanford, work at Google for a decade, and then graduate from YC or TechStars. You'll be funded almost instantaneously.
Everyone else, which is like 99.9%, should start to build relationships with investors early on. Better start with meetup groups and networking events before you actually need to approach them for money. Even before you fully validated your startup, so that they can see a progression from the idea stage to a real business. They will have some perspective on the type of person you are.
The first step is to find people that know and trust you to get small dollar amounts from accredited investors. The next stage is to participate in one of the incubator programs. This is a great way to meet investors and to set yourself up for success with VCs.
Max: I would differentiate the business angels from VCs. If you are a very early stage startup try to reach out to business angels. They are the ones who invest on a more emotional level. They really care about passion.
Will: Chris, how should startups evaluate potential investors? What should they be doing?
Christian: Think about the sector specialisms that they have already invested in, some of the complementary companies in their portfolio. Is that a good network for you? Is there a track record of developing this particular type of business? Look for the company that got to that VC before you. It’s very unlikely for a VC to invest twice in the same specific product.
Then more broadly: listening to them talk, go to their events, see if they are the type of character which will help you. And then, the individual investor is also important. Who's going to be sitting on your board? Who's going to be taking those decisions? Who's going to be guiding you through rough patches? Who's going to be lifting you up when it's a good time? These are all things that can only be done face-to-face. You're also getting that feeling as well. It's not a one-way street. You do need to understand where your synergies live with the VC as well. Both in terms of character, but also in terms of network and cash availability.
We hope that the insights that our speakers shared will help you raise investments and get funded in these dramatic times. We will keep bringing you outstanding experts that are transforming businesses in various domains. Follow us on LinkedIn, Facebook, and Twitter to stay updated about our news and events.