A venture capitalist's advice for startups looking to raise money during this pandemic

A venture capitalist's advice for startups looking to raise money during this pandemic
  • Look at the investor's portfolio before raising money. The investors’ know-how of your industry is important.
  • It is important to see if the investor you plan to raise money has a good network that can be tapped into for strategic partnerships and to acquire customers.
  • If the investor has a good network, future fundraising will also be easier.
  • Do consider debt as an option before selling equity in the middle of a crisis.

The Covid-19 pandemic has had serious consequences for large parts of the global economy. The pandemic is also a difficult time for startups. Only just over one in two companies in investor portfolios is spared or able to benefit from negative effects. In contrast, almost 40% of companies are having serious problems coping with the crisis.

Venture capital firms have therefore significantly reduced their investment speed, which is now down to 71% according to a survey by Stanford, Harvard & Chicago Profs. Even after the crisis, this will only be a good 80%.

At the same time, however, the crisis is also a catalyst for change. The speed of innovation is currently significantly increased, especially in critical areas. The most impressive effects of the pandemic can be seen in the area of medicine, which must abruptly become more digital, and in the area of work, where there is a clear shift toward remote work. The same applies to topics such as digital education, e-commerce or the efficiency of supply chains. These areas in particular offer great opportunities for founders at the moment.

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Relevance counts more than ever for venture capitalists

The approach of assessing the attractiveness of business models has however not changed fundamentally since the pandemic. Nonetheless, developments in some industries have been significantly accelerated by Covid-19, while others have been slowed down, such as global tourism. It is important that founders are aware of the consequences of these trends and that they take them into account when assessing their business models. In order to be attractive to investors as a start-up today, it is therefore more important than ever to pay attention to the following points:

Especially in times of crisis, critical problems must be identified and solutions developed based on them. Those who succeed in doing so are sure to attract the attention of investors. Examples of this are companies like Workmotion or Zoom. In a world where home office and remote work are the new normal, Workmotion enables the shift to remote work and access to global talent pools through global employment solutions. Zoom, on the other hand, allows globally dispersed employees to collaborate efficiently. And with Limehome and Airbnb, two providers have counter-designs to classic, contact-intensive hotel concepts. On the other hand, anyone offering products and services that do not solve a relevant problem is currently having a hard time.

Customer satisfaction and their needs should also be the focus for startups in times of crisis. The focus should clearly be on strategically important customer groups and on the ambition to deliver relevant added value to customers. In this context, spending on further development of the product makes much more sense than short-term marketing campaigns.

Rapid growth is critical to success for start-ups. However, crisis situations and the uncertainties that accompany them can lead to companies having to reduce their cash burn in order to survive the crisis financially. Startups should therefore be able to control their burn by temporarily slowing their growth. Burn should be directly related to growth and actively controlled.

Founders should be able to both recognize the long-term impact of Covid on their business model and make necessary adjustments in the short term. To do this, entrepreneurs must weigh up two fundamental questions against each other. On the one hand: what short-term measures are necessary to survive the crisis in order to continue to be successful with the original business model afterwards? On the other hand: To what extent do I need to fundamentally change my business model in order to remain relevant in the long term?

Finding the right investor

If founders and their companies follow the points described above, broad investor interest is very likely. Essentially, two parties are relevant in the process of financing a company - founders and investors. Both parties must ultimately make the decision with whom to partner. Choosing the right investor is critical to the long-term success of the company. At its core, the choice should therefore revolve around the question of what added value the investor brings to a company in addition to the capital. The following factors are particularly relevant:

●Industry expertise: the know-how on the investor side can be more important than the investment itself. An investor's portfolio companies provide insight into which industries an investor is particularly active in.

●B2B network: Good contacts to business leaders can enable relevant strategic partnerships and facilitate customer acquisition.

●Investor network: an investor's reputation in their industry and access to their investor network can make fundraising in follow-on rounds much easier.

●Key Positions: Especially in the early stages of a company, the investor can add tremendous value by helping to fill important key positions. The network helps in the search for talent and the reputation in hiring suitable candidates.

●Debt financing: Beyond the actual equity investment, it can also be of great added value for capital-intensive business models to gain access to other forms of debt financing through the investor.

The cooperation between investors and founders should take place in partnership and at eye level. The best insight into the way an investor works is gained by founders during discussions with companies in the investment firm's existing portfolio. Before deciding on an investor, it is advisable to ask for a reference.

Early-stage startups currently at an advantage

Early-stage startups have an advantage in the current situation when it comes to investor interest: they often focus on developments that were accelerated or even only initiated by the Covid-19 crisis. In addition, early-stage companies are much more flexible and can react more quickly to macroeconomic developments. Therefore, anyone who is currently aiming to found a company or is looking for investors as an early-stage start-up could currently be ahead of the game in terms of investor interest.

About the author: Robin Godenrath is the founding partner at Picus Capital. Founded in 2015, Germany-headquartered Picus Capital has invested about €100 million in over 80 companies worldwide. It makes investments in pre-seed, seed and Series A rounds.

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