Business as usual?
Candid conversations with fellow venture capital investors in both Israel and the US
“We are in business” has become the new venture capital (VC) investor tagline over the past month or two, as many startups and growing companies have been trying to assess their situation in the new normal following COVID-19 and how it will affect their chances to fundraise today and in the near future.
For me personally, being “back in business” has a double meaning as I just got back to work during the month of April after 4 months of maternity leave, right smack-dab into the craziness of this global pandemic. Thankfully, we have been active with our investments over the past few months and most of us VCs and high-tech employees will be back in the office very soon as things seem to be getting a bit more sane (at least here in Israel and Tel Aviv, specifically). This is of course good news on so many fronts, but given the recent shock to both the public and private markets, the repercussions affecting startups will most likely continue forward for the next few months. Some say till the end of the year.
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I myself was also curious to see how fellow investors, both in Israel and in the US, were looking at this situation from their funds’ perspective. After having conversations with friends who are GPS, Partners and Principals at various VC funds — both early and growth stage funds located in Tel Aviv, NYC, SV and LA — a few patterns kept coming up. Here are the takeaways from conversations I’ve had just this last month:
“The bar has become higher”
Although I’ve heard this from multiple investors, there is no clear indication or benchmark at the moment that would define clearly what that means. If before COVID-19 you could look to SaaS benchmarks as an example for where your startup should be based on the stage of the product and/or fundraise, it’s unclear if those benchmarks would be relevant or enough today. In general, investors will most likely need far more inputs to reach conviction than before. As a founder, you need to be prepared to hear many different view points regarding what would constitute viable qualitative and quantitative metrics.
“Time to Value” has become a more important indicator than before
Out of the metrics that is probably most looked into by VC funds nowadays, time to value is probably the most critical, especially for early stage investors. The reasoning is pretty clear — with so much uncertainty as to potential sales, retention of clients and what the fundraising market will look like in the near future, if you as a founder can show value to your potential customers sooner than later, that will lend to the conviction that you will be able to generate the right metrics and numbers towards your next round. One specific takeaway that resonates well is “optimize for engagement, not revenue”. It’s not a rock solid playbook, but it is definitely something to work on from a product perspective and highlight as a KPI when speaking to funds.
No events, meetups, walking around means a lot more VC catch up calls
When face-to-face interactions is not a possibility, it means that many funds will turn to their colleagues to discuss interesting dealflow and share notes/ ideas. As a founder, this is something to keep in mind and use to your advantage. Do not be weary of sharing who you have met or spoken to, because chances are investors will talk about it anyways and it can only benefit your fundraising efforts. Especially given that many funds want to partner and collaborate with each other on a financing round, whether they lead or follow.
Taking more time for due diligence
This is a result of what I wrote above. As most VCs want more metrics, data and a higher bar to reach conviction, in most cases getting to a term sheet will take more time than pre-COVID days. Founders can expect more questions, more zoom calls, more time. Patience is a really important factor these days in general, and even more-so when already in conversations with funds. Always good to be tenacious, but recognize and adapt to the change on the other end of the line.
Many VCs are not looking beyond their existing pipeline
This is a tricky situation which will hopefully pass soon as we get to the office and having “mask-to-mask” meetings soon, but for now it means that founders will generally have a hard time building relationships with investors they haven’t spoken to pre-COVID times. Why? because most funds, even the early stage funds, will have a hard time giving a term sheet to founders they have met on a zoom call. I’m sure there will be outliers (I personally don’t see it as a major limitation), but the general vibe from investors is to look into companies they have been tracking over time or met recently.
Valuations will drop, there will be a correction, but TBD when
Many VC investors say they are waiting for valuation drops — but after speaking to a few founders that received recent term sheets, it seems that the drop in valuations already exists. Deals have been closed during this last month with either a similar valuation the startup had 12-18 months ago, basically extending the last round on the same terms, or a with a new valuation granting the VC fund anywhere between 5–10% more in equity than they previously negotiated pre-COVID. Founders should not focus on keeping so much of the pie to themselves nowadays, as cash in a living company is far more valuable than holding lots of equity in a company that won’t survive the next year.
This list above may sound a bit gloomy from the founder perspective and you may be asking “where is the good news”? Well, many VC funds do have large capital to deploy as new funds finalized their fundraise not long before the pandemic began or the year prior. There is capital, it’ll just be tougher (perhaps slower) to reach a deal. Also, Tel Aviv is slowly starting to become alive again, and just the ability to start having “mask-to-mask” meetings or sit 2 meters apart in an open cafe/ park will generate new relationships and for sure deals as well. Given that the NYC, SV and LA have not been showing signs of business as usual just yet, it’s important to focus on maintaining existing relationships while also taking the time to try and cultivate new ones, so that when the time comes you will hopefully have some open doors.
The tech industry in general is used to overcoming crisis situations, and thinking out of the box is how the industry has always thrived. Zoom calls will lead to some deals over the next few months. Deals will get done but at a different and slower pace. Truly talented founders who make sure to focus on the above, maintain patience and tenacity, will raise money and plow through.
