Given the current business environment, what is the best approach to raising and managing capital? In the past few days, MaRS has received many questions about securing investment from our venture community. In response, our team polled Canadian and U.S. investors focused across sectors and stages to get their perspective and advice.
Below are 15 takeaways from investors in venture capital, corporate venture capital and VC debt providers to help guide your fundraising strategy.
For many funds, there’s still plenty of powder in the keg, but keep in mind that in this climate investors may be choosier, and in some cases press pause in this climate on new investments.
“Publicly, many are saying they are still open for business, but privately, our sense is folks are becoming more selective.” —NYC-based VC
“No measurable impact now, but reduced in immediate aftermath and then increased if funds have dry powder to deploy.” —Large US-based VC
“We’re still evaluating active deals with companies we’ve known and have been raising. [We are applying] far greater scrutiny on the cash runway and a far more conservative lens on revenue forecasts with lower growth assumptions.” —Canadian VC
“It’s too early to tell for our profile (we do about three to four deals a year given that we’re growth-stage concentrated investors). We’d expect the next couple months to slow down but that’s because companies are in fire-drill mode of supporting end customers and managing cash — I wouldn’t expect a profitable founder to want to chat about growth capital needs in the near-term.” —NYC Growth VC
Given the new risk environment, investors will be increasing their scrutiny of ventures. Their inability to do in-person meetings to see working prototypes, for instance, or to get a better feel for the team and to build trust will likely drag the discussions out.
“Interaction with the teams is a crucial element in the pre-investment stage. Not being able to travel will further hamper the investment process.” —European VC
“We expect the sales cycles for startups to be longer and more volatile in most markets, meaning we will likely do even more sensitivity analysis to pipeline projections, hiring plans and size of round to ensure there is enough capital in the business to reach the appropriate milestones for a potential next round of funding.” —Bay Area–based VC
“We are taking a double-look at our deal flow to find hidden gems that we may have missed earlier.” —European Health CVC
Ventures will want to close “in process” rounds as quickly as they can before the deal sours.
“We’re advising those who need cash to quickly close on whatever debt or equity they’re currently debating, rather than trying to negotiate too hard.” —Silicon Valley VC
Corporate VCs will be pressured to deprioritize BD, especially when investing happens off the balance sheet.
“We expect money to be taken off the table. We are definitely putting the brakes on most BD activities, and it’s unclear how long we will do so.” —Canadian CVC
The bad news: we’ll see downward pressure on valuations. The good news: many VCs will see this as an opportunity to invest and may even increase their deal activity. Negotiate accordingly.
“There was a general sense prior to COVID-19 that private company prices were high and had gotten away from traditional valuation approaches and revenue multiples. I think now there will be a bit of a reversion to a less frothy time.” —Boston-area VC
“I suspect we will reset to 2011/2012 levels of total capital inflow and valuations if the market reaction is sustained” —Large US VC
Many investors said they were happy to engage with ventures virtually — to an extent. Make sure you have access to a solid video/web conferencing product, such as Zoom, WebEx or Skype as well as a strong Wi-Fi connection.
“This means there is much more virtual interaction with companies that are raising. It does not impact most of the interactions and diligence (e.g. financial reviews, expert interviews, etc.), but it will impact our ability to see products and prototypes. We’re navigating that on a case-by-case basis.” —Silicon Valley VC
“We had a strong preference for in-person meetings when evaluating early stage companies, so we are trying very hard to not let our process slow down because of this.” —Boston Health VC
“Most startups have already implemented a ‘virtual work’ strategy and interactions with investors have moved to video conferencing or phone calls.” —Canadian VC
It’s time to double down on relationships with investors you know and have already met in person.
“Everyone is in the same boat, so we’re going back to our networks to reconnect and catch up with those we know.” —Silicon Valley VC
“Conferences tend to be limited sources of deal flow for us, since a majority of our deals are sourced actively or through known contacts. Our outreach to groups and vice versa remains unchanged, albeit with more virtual meetings rather than coffees.” —Canadian Health VC
Ventures need to reduce burn and conserve cash. Be able to articulate a capital resiliency and business continuity plan. Demonstrate your ability to ride out a 12- to 18-month storm.
“Focus on the business fundamentals (customers, products, value prop overall) to drive the raise. COVID-19 is expected to be temporary so show you have a plan ready to address any weakness in the company (supply chain, customers, etc.) while the virus works its way through the system. Make sure you ask for more money than you think you need and cut expenses early to save cash to ride out the downturn.” —Canadian VC
“Think about the implications of COVID on your business — how will this year shake out if you have no new bookings the rest of the year and churn dials up? What does that mean from a cash perspective? How are you planning to adjust now to ensure you’re able to meet any dip in cash? There are plenty of sources of capital so don’t worry about that at this stage; focus more on going back to the basics of the business internally and making sure you have a contingency plan in place for your employees and customers.” —NYC Growth VC
It’s important to figure out the impact the pandemic will have on sales, the sales cycle and your supply chain.
“What is the current and forecasted impact on your ability to achieve sales, how is this impacting active deals and the expected sales cycle (i.e. time to close/ability to implement), and what will the impact to your supply chain look like for current deals and/or operations. And, of course, what are your mitigation strategies.” —Canadian VC
Talk to your existing investors, and make sure they are up to date and on board with your plan. How many of those investors are willing to inject more capital into the business?
“It’s maybe time to turn to existing investors to line up bridge financings to outlast the uncertainties.” —Silicon Valley VC
“Talk to each of your investors to see where they stand with regards to putting more money into your company and discuss options to do so sooner than later. This is especially important if most of your capital is from non-institutional investors such as angels, family offices, or corporates. They may have different views on volatility and illiquidity during downturns and have not lived through a recession in the tech market.” —NYC-based VC
“I think everyone is in a wait-and-see mode for the next few weeks. Most VCs are focused on their current portfolio.” —Canadian VC
Some sectors may actually see an acceleration of business activities. For ventures in these counter-cyclical sectors, consider boosting sales and marketing efforts if you can demonstrate cost and efficiency gains to customers.
“If you have a business that can thrive during this time of stress, certainly explain how and showcase it.” —Canadian CVC
Adapt your pitch accordingly, weaving the above points into your new “COVID” narrative.
“A lot of funds still have money and still need to deploy but you need to paint them a picture of how the company is managing the exposure and why it is still a good investment.” —Canadian VC
While physical conferences may be cancelled, there are still good ways to network. Sign up for virtual events as a way to stay on investors’ radar.
“We’re continuing to reach out to people on the attendee/presenter list to set up calls. Certainly, it’s not as helpful as being in the same room, but we generally don’t feel like we’re missing too much.” —NYC-based VC
“We are attending virtual demo days and events and sourcing opportunities via our network. While conferences are an important source of deal flow, we continue to receive high volume of referrals via our co-investors, founders and LPs.” —Canadian VC
Lean more heavily on such organizations as MaRS to get warm intros to new investors.
“There are multiple sources for deals that we have set up, including accelerators like MaRS, proactive outreach, co-investing relationships with financial institutions and inbound deal flow through PR and content marketing.” —Montreal-based VC
Are you expecting to raise capital later this year? Start future fundraising activities sooner than later — you’ll need the extra time.
“For those that aren’t currently raising, I’d say they should start the process a bit earlier than they normally would as that will give them a longer timeline.” —NYC-based VC