The pandemic has shut down the economy, left millions of workers out of a job and driven companies out of business. Given the current economic conditions, this may not be the easiest time to raise capital.
However, despite widespread fear that venture-capital investment would dry up, deal activity fell just 6 percent in the first half of 2020, compared with the same period of 2019.
One explanation for continued investor interest is that many great companies are launched during recessions. Mailchimp was launched during the 2001 recession. Uber, Airbnb and Slack launched during the 2008 recession. Layoffs can give talented people the nudge they needed to start that company they always dreamed of. According to Dick Costolo, Managing Partner ad 01 Advisors, “These moments of disruption can be the times when some of the very best companies are created because people have the impetus to give it a shot.”
If you are an entrepreneur preparing to raise capital, what’s different during the COVID-19 outbreak?
What are the keys to successfully navigating the current funding context?
In order to answer those questions, I’ve interviewed entrepreneurs that have raised a cumulative $300 million this year. Their financing stages range from Seed to Series E. In addition, you’ll hear from investors who have continued to invest during the pandemic. This article is a summary of their most salient advice.
Entrepreneurs need to honestly assess if the timing is right for their companies to raise capital.
In more optimistic times, a company may be able to raise seed capital on an idea and a pitch deck; now investors require more. In this economic climate, entrepreneurs should have clarity on the product, distribution and brand before talking to investors. Noah Gray, CEO of Onda, a canned spirits brand, just closed more than $1 million in seed capital. He says, “Think how you can beg, borrow and steal your way to a minimum viable product and a minimal minimum viable brand to eliminate the uncertainty for investors … There is so much external uncertainty that you can’t control. You have to take the uncertainty out of the area that you can control.”
Keep an eye on the rest of your industry. If you are a challenger brand, look at the company you are trying to disrupt to understand the health of your industry as a whole. According to Ross Richmond, COO of Arrive Outdoor, who just closed a $4.75 million seed round, “If everyone is being laid off at the companies that you’re trying to disrupt, maybe there’s an opportunity there. Or, maybe the industry is being hit, and it might be a good time to think about delaying the raise, or pivoting and creating a new angle to serve your industry in this moment.”
Now more than ever, having the right relationships with investors in place before the raise is essential. “We invested a lot of energy over the last couple of years to get out in front of investors because that allowed us to have a lot of warm connections that have been built up over years,” says Sanjay Banker, CFO of Sonder, who recently closed a $170 million Series E. “Absent COVID-19, we might have cast a much wider net and perhaps also contemplated a longer process. In the context of COVID-19, we focused on investors that we already knew and were familiar with our story.”
The Zoom Pitch
Coronavirus has shifted investor meetings from coffees and conference rooms to Zoom calls. Whether we like it or not, that’s the current reality. Can you really make investment decisions over Zoom? Investors are split. But deals are getting done. I don’t think any investor or entrepreneur thinks this is ideal, so how can an entrepreneur make the best of the situation?
First of all, entrepreneurs need to set themselves up for success. Invest in high-quality video and audio, and do your best to secure a private, quiet place for the call. A good Zoom setup shows your professionalism.
“You’ve got to change how you pitch,” according to David Rogier, founder and CEO of online streaming platform MasterClass, who recently raised a $100 million Series E. “You can’t just have a deck and walk through it. It is going to fall flat. Talking over Zoom for an hour with slides is the definition of boredom. Admit that this is awkward and say, ‘Hey, look, I haven’t mastered the craft of pitching over Zoom. It will be boring if I’m just talking for the full hour.’”
Costolo, a MasterClass investor, agrees. He recommends sending the deck for investors to review, but focus Zoom meeting time on conversations rather than presentation. “Having a discussion with investors over Zoom is much more productive,” he says. “It helps us get to know entrepreneurs when we can’t sit in front of them.”
Relational Due Diligence
Bringing on investors right now is like going from an online date straight to marriage. Entrepreneurs don’t have the opportunity to confirm their in-person business dynamics align with online conversations, and interpersonal dynamics are essential for making any professional relationship work. Once the ink is dry, you’re in the trenches with this person, so it’s best if you actually like them.
Investors spend a decent amount of time and energy doing diligence on a company before a deal. Smart entrepreneurs do the same. If this person is going to be an investor, prioritize time to get to know who you’re collaborating with. So, how do you do that during COVID-19?
Rogier recommends, “I would talk to three to five entrepreneurs for every investor that I was considering. Ask them to describe a time where they disagreed with the investor or were really frustrated with the investor. It’s okay that you don’t agree. You aren’t always going to agree. It’s okay that there are times that you’re frustrated. But you want to know what occurred and how the investor handled it. My last question on reference calls is ‘Is there anything else that I should have asked you?’ That question elicits really great answers.”
Entrepreneurs should also be more proactive about offering to help investors get references. Costolo advises, “You’re trying to build a relationship and build trust. It’s so hard to do when you don’t have subtle in-person visual cues. In this new reality, it’s good for entrepreneurs to acknowledge, ‘Hey look, I know we haven’t been able to meet in person. You should talk to these two angel investors in my company. Get their thoughts on what I’m like to work with as a CEO.’ It’s worth over-indexing on personal references in this time when investors can’t be in the room with you.”
With the uncertainty, there’s no guarantee that companies will be able to raise at the normal cadence, so entrepreneurs should build their financial models and manage their cashflow assuming more time between rounds of funding.
Costolo notes, “It’s not all clear what’s going to happen. Therefore, assume that regardless of the shape of the recovery, your cash on hand plus the money raised will get you at least through 2021.”
Josh Fesler, Partner at Freestyle Capital, supports that point. He encourages entrepreneurs to “take control of your own destiny by extending the runway, even if it slows the growth of your company, so that you have more time to find investors who believe in your vision. If you run out of runway, your business stops. So, extend as long as you can—even if it hurts.”
The COVID-19 Pivot
Your business is designed to excel in one world. Then, all of a sudden, the rules of that world have been turned upside down. The basic assumptions that you built your business around are no longer true. The fear and uncertainty can be overwhelming. In order to adjust to the new environment and survive the pandemic, every business has had to make their COVID-19 pivot.
If you are raising capital, get ahead of the question from the investor about how you’re responding to COVID-19. Develop an internal thesis, and rapidly test and iterate on that thesis. Do it quickly, and track clear metrics to know whether your pivot is effective. Then honestly communicate that with investors. Fesler prefers to hear what’s working, what’s not and what you are trying next. “Tell them what your thesis was, how you tested it and came to the conclusion that it wasn’t working well enough—yet. Plot at least three other approaches to test.”
Banker’s company, Sonder, is in the hospitality space, which was hit hard. “We pivoted a lot of our product from short-term guests to extended-stay guests,” he explains. “We took a sharper focus on costs and cash management. It was obviously really important to respond to the moment. But it was also really important for our fundraising efforts because, more than anything, investors wanted to see the efforts themselves. They want to see how the entrepreneur adapts and adjusts to the shock.”
The hospitality, events and restaurant industries have taken a big hit. Onda’s plan was to launch a new canned spirits brand this past summer. A key part of their strategy was in-person activations at bars and events in New York City and the Hamptons. Once COVID-19 hit, all the bars shut down, and nobody would drink random beverages from a stranger. “We had to change our whole go-to market strategy,” Gray says. They pivoted their focus from in-person to online activations. Their investors cared less about their five-year plan than they did about their ability to effectively change the go-to market strategy.
Matt Pohlson, CEO of Omaze, an online donation platform, who recently closed a $30 million Series B, was in the middle of the raise when COVID-19 hit. He says, “in a 36-hour period, we had to create an additional deck focused on how our strategy and operations will evolve in response to COVID and the corresponding economic downturn.”
Banker can also relate, confirming, “Very quickly about half of our original deck became inoperative, so we we shifted to a weekly dashboard in those early days of March and April. This dashboard articulated and measured our five-point plan to respond to COVID-19. Every week, we were giving updates against each of those five points. We created a new deck, which is 50 percent focused on our long-term vision for disrupting the hospitality industry and the other 50 percent was on how we’re responding to COVID-19. The really compelling results of that response and the opportunities that we see will be in the next three or six months.”
“We actually did not tweak the deck that much because the deck was talking about our core business and our fundamental business, and those fundamentals don’t change,” Rogier elaborates. “But what we did share is in the stats room and the data room. Usually when you raise, you do not show the last week’s sales. You usually show last year’s sales. But this time, we would share things on a weekly basis just because the situation was so dynamic.”
Arrive Outdoor feared that the pandemic, which shut down the travel industry, would keep people home. So, they focused on the things they could control, preparing for a, perhaps distant, future when people were getting outside again.
“We did everything we could to prepare for the economy opening back up, so that we’re not flat-footed when things do start to ramp back up,” says Richmond. “Then out of nowhere, this summer became the summer of camping. We could have never predicted that, but fortunately, we were prepared to meet the demand.”
For some companies, the pandemic has actually had a positive impact on business. If you find yourself in that position, understand that the pandemic will end at some point. So, investors will want to understand how your company will succeed in a post-pandemic world.
“Framing this pandemic as a beneficial change to your company that will last forever is not smart,” Costolo explains. “It’s not at all clear what things are going to look like in 2021, so I would avoid attaching too much weight. Who knows if that’s going to be a permanent or temporary change?”
In more uncertain times entrepreneurs can often pull back from communicating to investors or potential investors for fear of communicating bad news. However, during crisis or uncertainty its more important than ever to be honest and over communicate.
Honesty is essential to investor Fesler. He says, “Entrepreneurs are trained to say everything is great; we’re the best at everything; and we’re going to grow to the moon and back. But now if you say that you lose credibility because all investors know that the crisis is making everybody scramble. And so the first thing we want our founders to do is really admit what isn’t working because of the crisis and be upfront about it.”
Banker notes, “My biggest piece of advice to anyone fundraising this climate is to over communicate. That was especially true when uncertainty was at its highest and March and April and May, but it’s still true today. We’re speaking to our investors at a cadence that would not have been the case prior to the pandemic.”
Opportunity in Crisis
Counterintuitively, startups and early stage companies have an advantage as the consumer behavior is shifting during the pandemic. According to a McKinsey report, the crisis has prompted a surge of new consumer activities, with an astonishing 75 percent of US consumers trying a new shopping behavior in response to economic pressures, store closings, and changing priorities. This general change in behavior has also been reflected in a shattering of brand loyalties, with 36 percent of consumers trying a new product or brand. Now may be the best time to be an agile challenger brand as consumers are more willing than ever to try something new.
“Anytime there is a crisis, it leads to reflection,” Pohlson says. “There are a lot of companies that were holding on to old models or old ways of doing things and not evolving. This crisis will result in a reexamination of old systems. In this environment, there is an enormous opportunity to accelerate change at a much faster rate. There are going to be a lot of great businesses, they’re going a lot of great entrepreneurs, they’re going to come out of this, there’s going to be a lot of dinosaur companies that will not.”
World News || Latest News || U.S. News
Help us to become independent in PANDEMIC COVID-19. Contribute to diligent Authors.