VC Investment in Times of Crisis

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Not much of an intro is needed, The World is different today. You might have thought that fundraising is something easily approachable, and now there are many open questions – to fundraise or not to fundraise, what to do with a round in progress, how to close funding deals, are VCs even considering new investments or are they on lockdown too? While a list of Active investors in spite of Corona circles around and VCs say that they are open for business – what does it really mean?

To find some answers and to help our portfolio startups get through this crisis as smoothly as possible, we gathered a panel of 5 amazing people and great professionals representing some of the best VCs in Europe, sitting in Tallinn, Riga, Warsaw, Vienna, and Berlin to talk about VC investments in times of crisis. Here are some of the highlights from this conversation with Alex Zhigarev (Speedinvest), Antony Tikhonov (Seedrs), Andris K. Berzins (Change Ventures), Chris Kobylecki (Innovation Nest), Riivo Anton (United Angels VC), lead by El Patron Cristobal Alonso (Startup Wise Guys).

Where are we at?

All participants agreed that we are facing a big economical crisis, potentially even bigger and affecting a wider spectrum of industries than the 2008 one, and clearly not just localized to the financial sector. The Hospitality (travel, hotel, restaurant) industries are really in for a super tough couple of years.

It’s the worst time to fundraise, if you are operating in a vertical or with businesses affected by the crisis. You are really f***ed. However, for others this time is as good as others. However, I’d still rather focus on extending runway and survival.

Chris Kobylecki, Innovation Nest

Things might be looking brighter for companies from these affected verticals that have just raised, but still, survival is tough. On the other hand, there is an obvious push on some technologies like VR or AR, remote collaboration tools, and industries like MedTech or BioTech.

I wouldn’t by default write down companies in verticals troubled by crisis. If they have managed to raise significant funds right before the crisis, they might be in a very good position once things get back on track.

Riivo Anton, United Angels VC

While VCs are open for business, raising rounds will be more difficult and valuations will go lower, yes or yes. Andris noted that it is very important to understand what will happen to valuations down the value chain (series B, series C, etc) and how they are going to look in 18-24 months. 

In the previous crisis valuations went down by 30% on average. We expect the same if not lower. Series B upwards is going to be carnage.

Andris Berzins, Change Ventures

Most panelists also agreed on being more cautious and adding additional elements to check, when considering new investments, but also considering the performance of their existing portfolio startups.

We are looking at 4 risks right now:
Demand – has it changed, increased, decreased, how’s it impacted?
Unit economics – specifically the price of the service/product and costs
Execution – can the processes and product be adapted to remote situations
Credit risk – what the impact of it might be on the business

Riivo Anton, United Angels VC

For an even more detailed outlook on how startups should be addressing the crisis impact on their business, you can read Riivo’s recent blog post.

While there has been a slight drop in equity crowdfunding in the last month, Antony from Seedrs also sees  increased demand from startups, and interestingly, also from industries that traditionally would not consider equity crowdfunding such as biotech.

Retail investors are looking at: the vertical, ie, if/how it is impacted by the crisis, and how lean is the company to execute. (..) Startups are reaching out to us and are definitely interested in equity crowdfunding now that Business Angels and VCs are pulling out. The big question is liquidity.

Antony Tikhonov, Seedrs

All of our panelists positively stated that they are open for business. In fact all of them have just finished deals in the past 2 weeks (disclaimer: all of those terms sheets were signed before and VCs just honored their commitments). Until July and August while everyone is open to talk, nobody feels comfortable predicting any future scenarios, which means that some months are needed to understand and forecast the “new” normal. While Baltic based investors like Andris were more optimistic of getting back to certain normality in this region already by this summer, others like Chris were leaning more towards 2021 to be getting back to “life as we know it,” and probably still with a certain twist of “the new normality”.

Bridge rounds and care of the portfolio

All of them also stated that they are more focused on protecting and caring for their existing portfolio and that the amount of money dedicated to bridge their portfolio will be larger than it would have been before the crisis.

I think for all of the founder friendly funds it’s basically our duty to help our portfolio with bridge-rounds.

Riivo Anton, United Angels VC

I’d suggest being careful just “bridging” for the sake of survival. We ask our portfolio companies – what’s your survival plan for next 9 months without the money, and then – how getting a bridge round from us would impact that and your ability to chase opportunities.

Cristobal Alonso, Startup Wise Guys

Can you sell online?

Lockdown situations are forcing everyone to go online and in some cases this is the tipping point that has been needed for a long time, thinking about governments going online with their processes or full enterprises managing to digitize buying processes that before required workshops, committees and in-person meetings. The same applies to the processes for how VCs make decisions. One of the participants explained how in the past, one of the final steps of the round for the VC was to invite all startup cofounders to come to the office and do a workshop with 3 or 4 partners. Now it is happening online and in fact, that means it happens much faster as it is easier to coordinate all agendas.

Apart from other risks, when evaluating startups, we’d also check – if it is even possible to have a full sales cycle online, as there are certain Enterprise products, where that is basically impossible and those startups are going to have a really hard time.

Alex Zhigarev, Speedinvest

Back to business and product?

Crisis is often seen as a time of purification, probably the same can be said about startups and investments. As Chris said – many startups will die, and that unfortunately, simply is what it is. Already without the crisis the normal survival prospects are extremely low. On the other hand, Alex noted that “we had never seen so much “dry powder” as in the last years in the VC investments”. Does it mean that the crisis is bringing us back and closer to “business” and further away from startup hype? It seems so, and being always on the lookout for MRR growth rather than valuation and next rounds, we at Startup Wise Guys are very happy to be on the same page with other investors.

It’s gonna be more about business, about unit economics, break-evens, and less about exits and acquisitions.

Riivo Anton, United Angels VC

It’s all about fundamentals now, compared to the hype and valuations before.

Alex Zhigarev, Speedinvest

4 pieces of advice from VCs to startups

When asked about the most important advice for the current situation, all investors were in agreement and it should not be a surprise – extend your runway! So there’s your first piece of advice. However, apart from pure survival, Andris also suggested giving a thought to what opportunities this crisis provides for your business.

The second piece of advice was to take care of the team and to focus on leadership. As Antony put it: “It’s nice and easy to be a leader in the hyper economy. But now the impact of leadership is even more important.”

Solidify the team, little gestures from founders to employees who might be stuck at home with school age kids, etc, will go a long way and will be repaid in loyalty.

Andris Berzins, Change Ventures

The third piece – don’t postpone talking to investors till July or later, talk now, but the important aspect is – do it with a relationship building, and not a transactional goal in mind.

Last but not least – have a plan (or at least give it a thought) for what you are going to do when things get back to “normal”.

When a crisis is booming, people naturally try to take less risk and act cautiously. But the question is – what is going to happen when we come back to “the normal state of things”. I ask our portfolio companies – do you have a plan for what you are going to do, when things get back on track.

Antony Tikhonov, Seedrs

Panel on “Investment in times of crisis” was initiated by Startup Wise Guys accelerator for its portfolio companies. Thank you to our panel participants for being straight-to-the-point and open for this conversation.