Many founders are looking to raise capital as we head into the eye of the storm that is Covid19. A crisis of epic proportions, far different to 2008 crisis and others that went before. And for many founders and CEOs this may be the first time they have experienced something like this. Forced to work from home, make harder decisions, revisit business plans and models.
remeber every crisis spawns new opportunities and markets. The birth of Fintech and Bitcoin came about in 2009 as banks were constrained, weren’t lending and public behaviours were nervous.
So what about this crisis. What industries will be disrupted, what new tech will emerge, what new markets will open as a consequence of others declining?
The general prognosis is nobody knows when this will end but one thing for sure the new landscape will emerge post Covid19. Everything is fluid. Despite varied opinions we will return to business as usual soon enough, I see it slightly differently. There will be new norms, maybe small things like shaking hands will stop, there will be less airline travel as people adjust to business life on Zoom and find it cheaper, commuters preferring not to travel on public transport that is unhygienic, and the confidence those they are meeting are low risk, especially for those that don’t develop Corvid in this round.
Then there are macro economic factors to consider for the future, given some fundamentals are likely to change. Not just money supply and the intrinsic value of fiat currencies, the threat of inflation spiralling with excessive QE will be there in background. Eventually this will push interest rates higher placing additional pressure on already stressed labour market. With 4 in 5 jobs impacted by Corvid, the inevitable Government bailouts, the level of support for the business sector differs greatly by regions. Europe offers some of the best help for businesses and families struggling, where in other part of the world there is limited if any help.
Then we have some countries ‘first out’, such as China, S Korea, Singapore. And those sectors and industries benefiting from shifts in business, doing amazingly well because they are either delivering primary front line products and services to support the crisis, or home or remote working. While others, especially those businesses with legacy business models unable to shift to online, or B2C with high direct customer acquisition costs. Will find it tough and ultimately decline. And local businesses start to boom, farm shops, butchers and convenience stores start to see queues again.
The ‘Shake out’ of weak businesses, shifts to online businesses, legacy one failing as they simply can’t move quickly enough, they don’t know how or wont.
“If you biggest competitor is a large centralised legacy business, go get them, take their customers, win over customers with online options and keep it simple”...
Industries are being decimated especially the ones with high B2C sales costs, high levels of deployed assets as sales functions, of signatories such as bank branches. Alternatively Fintech businesses will do well in automation, alternate payments, and simple financial services. Banks will suffer more as will any business unable to compete in a new world.
Single service business will close on mass, hit with lockdown and a shortage of cash flows. ‘Mom and Pop’ stores will close, Amazon the big winner. Pubs and Bars close, Supermarkets the big winner, Restaurants and entertainment will take time to return, Netflix and online entertainment to winner again, Home Working, the winner again Zoom and other communiations platforms. We will see demand returning slower in some areas because of impending restrictions on social grouping, as social distancing is extended as people will remain cautious of others and especially large gatherings and groups.
Things to focus on when fund raising:
Balance Sheet strength. Examine your balance sheet and think about how much capital runway you will need. In the opine of many you should be thinking the middle of 2021, and start thinking of capital needs now. If you have completed a round recently, should you be doing a top up now? If you are raising for the first time at Seed be realistic. If it’s Series A it will all be about showing how you are ready for the recovery, protecting cash, identifying ways to increase market share and going back to the mouths that have fed you last time.
Knee Jerk. Unless you are close to running out of available cash, don’t knee jerk. Decide when is the right time to cut costs, to ensure you don’t impact the little growth options you may have. When to furlong staff? Do you reduce hours, or get staff to accept a pay cut are tricky decisions, especially for key workers and specialist skills you will need later. It is worth spending time on how to make your money go further, think of efficiencies, and partnering and collaborating with other small businesses to share ideas, costs and supply, but also piggy back on each others markets, as an accretive product or service or simple add on.
Business model robustness versus what happens after. A crisis like this will be the ultimate test of your business model, and skills as a founder/CEO. Given consumer/customer behaviours will be impacted and opportunity gaps appear. If you have pivoted to online how easy are you to do business with, is the UX better than others, as with more on their hands your customers will be seeking best value and experiences. If you are already online and require distribution of actual goods, or post transaction settlement, or supply side, make sure you have different options and the supply chain is robust.
It is time to test the business model and simulate various scenarios, with extended periods of slow or no growth, plan for a dismal Q2 and Q3 now. The key elements to focus on cost to acquire and cost to serve customers, being more efficient and seen over the competition. Yes being seen.
Getting to a Term Sheet — valuations have cooled in some sectors already. So it is time to be sensible. Remember VC and PE funds are still seeing deal flow. Whilst they are focusing on their investments they will be offered opportunities for best value, even distressed assets that can be acquired as a bolt on to what they have.
If you have been dealing with a fund for a few months, and the deal isn’t done, it maybe time to revisit valuation to get it closed. Having said that if your industry is booming and or you are experience positive growth and new business then funds will pay a premium, given you are demonstrating the business model works in this scenario. Key markets — Medical, BioTech, Life Sciences, Pharma, Distribution, Home Delivery, Age-Tech, Food Production and essential equipment etc.
How VCs are thinking right now. It is worth remembering VCs have shifted their model with many already used to working remotely with a disbursed team, traveling less and using Zoom to speak to founders. Of course they will prefer to talk with founders whos businesses they already know, as face to face is impossible right now. But there are VCs closing deals on Zoom, admittedly at the lower end of investment ranges.
VCs will clearly look for projects addressing the market opportunities created by the crisis, and those industries that are resilient and or accretive to their portfolio. So make sure your can tell the right story, so if you are trying to raise capital to open a restaurant chain your time isn’t good.
The other aspect is maybe look for M&A opportunities, take out your competition, take their customers as they struggle or run out of money. Maybe more in keeping with later stage investments, but worth a look. Essential will be having committed client orders, even if pre revenues and need the capital to bring home the bacon. VCs are looking above all for realistic value, as they have distressed opportunities emerging. So timing is key. If your proposition relies on pre Covid markets, then it may be good to wait a little, or pivot completely.
Are deals getting done… The answer is yes, but many being announced were started pre Covid19. Are they being done now, well there are lots of deals being offered. Funds are sitting on cash they have to deploy to hit their returns. The are looking for opportunities as ever but through a slightly adjusted lens.
Families are also in the market and there has been a big shift towards tech already in 2019. This will only be accelerated with Covid19 as traditional assets won’t performs for a while, and some aspects of tech is doing well, and offers the best option for returns.
I have written about this previously. Families have three focuses 1. Passion projects and collectables 2. Giving back — social impact and sustainability projects 3. Anything that can demonstrate a return and the potential to improve liquidity options for their portfolio of businesses and assets.
Areas I am active in:
I am seeing good deal flow and conversations with investors, funds and families. In many ways we are having more conversations on Zoom and these are easier to organise.
I focus on Deep Tech, new frontier tech, new inventions and the emergence of Quantum Computing, Artificial Intelligence, Machine Learning, Augmented Reality early stage to Series B.
Fintech Marketplace Plays, Direct to Consumer Platforms, Commodities Futures Exchanges, AgriTech specifically crop yields, Security as in Quantum Safe, Defending National Infrastructure, Projects related to supporting the decentralisation of the enterprise.
So keep up the good fight, revisit things in view of the matters above and reach out to investors more and more. You never know. At least you know those you are trying to reach are at home!