You might be surprised to see what seems like a ton of IPO offerings now — during a global pandemic. Markets are also surprisingly healthy. Even more surprising is the fact that there are a lot of companies raising venture capital as well.
In fact, according to the NVCA, venture capital is extremely healthy. In the first half of 2020, over 5,000 companies have raised over $69 billion in capital. That works out to 28 companies a day raising $381 million a day. The largest two sectors receiving funding? Software and healthcare.
This isn’t extremely surprising, but it does point out a trend: venture capitalists and private equity groups have money to invest, but they can also afford to be picky about what they invest in. Let’s look at what fundraising during a pandemic looks like.
Short-Term vs. Long Term Profitability and Fundraising
Let’s say you are starting a new electric, autonomous driving car company in California (move over, Elon Musk). In the past, you might attract a lot of attention, because even though you need a lot of capital at the start and along the way, the rewards, in the end, would be great. Of course, that is provided you are successful.
If a big payoff is possible, likely even, venture capital would gravitate toward an innovative unicorn like this. But investors are more cautious now. They are looking for companies that will be profitable more quickly that offer less risk.
What does this really mean? Well, if you look at what we could call the “challenged” industries during COVID-19, you could come up with a list like this:
· Travel, pretty much the entire industry.
· Restaurants, Bars, and Clubs
· Advertising and Marketing, Particularly in the live television industry
· Businesses dependent on global supply chains
· Person to person businesses
These businesses are all challenged to find a way to operate profitably in the “new normal” that will emerge even post COVID. But some industries are thriving:
· Virtual Fitness (Peloton, now Nordic Track and others)
· Telemedicine and telehealth
· Streaming services (Netflix, Disney Plus)
· Virtual Meetings (Zoom)
· Work from home support (Autonomous and Other Home Office Suppliers)
· Data Centers and Internet Providers
Again, there are more, from mask startups on Etsy, which may be a short-lived industry, to tech companies innovating the way we work and play in a remote environment. In fact, game downloads are at record highs in both the Google Play and Apple App Store despite Apple’s fight with Epic Games.
Despite the controversy over privacy and other issues, apps like Tik Tok, Snapchat, Instagram, and others who promise mobile connectivity and entertainment are also thriving. What are the key things they all have in common?
Be a Disrupter or Innovator
First and foremost, those businesses that are thriving and raising funds during COVID are innovative and they are disrupting industries. Think of the evolution of the home gym from a set of weights to virtual workouts with trainers from around the world.
Disruption may result in initial negative pushback from various sources as well. Think of the fight between AMC Theaters and Universal Studios. The result was a disruption in the film industry that has been brewing for years but has now become a necessity. Before a settlement was reached, the theater giant threatened to never show another Universal picture again, and the film giant responded with indifference.
The result of that pushback could have been challenging for both parties. Instead, it forced a discussion backed up by the fact that movies released directly to digital were extremely profitable for even large studios. This is simply one example. From the already mentioned Zoom to NBC’s streaming venture Peacock and others, industry is being driven by disruption and innovation that has venture capitalists interested and investing.
COVID is sure to force many industries to adapt to an emerging new normal. Those who do it best will be better positioned to earn the attention and trust of investors.
Prove Your Profitability
When you are ready for fundraising, and you know your idea is ripe for innovation and disruption, you need to prove the practicality and profitability of your idea. Investors are looking for a few key things:
· Revenue: Do you have revenue coming in? From where? Is that revenue producing stable and growing cashflow, and will that continue after the pandemic?
· Your People: Who is running the company? Who is executing your idea? Will the experience and the profitability of your team endure long term? Will you attract new team members who will enhance the ability of your company to be profitable?
· Corporate Structure: Is your company set up in a way that can handle growth and increased demand? Are you nimble and able to adapt as needed? LLCs are less desirable than C-Corps, and investors expect your company to be set up in your state or a typical location like Delaware.
· Openness to Feedback: Are you coachable? Will you be willing to act on feedback to ensure long term profitability and short term gains?
There are still more questions investors will want answers to. Your Fundraising documentation must be easily and securely available, and you must be able to answer investors’ questions quickly and thoroughly.
Also, are you ready for due diligence? Is your documentation not only ready but complete and easy to navigate? Can you back up everything you claim in your financial statements?
In short, you need to be able to prove that both your idea, your product or service, and your company can be profitable. Funders will ask you questions based on things you should know and be able to answer. Most have been entrepreneurs themselves, and it can be discouraging to have a funder walk because you don’t know something you should. Be prepared.
The Value of Relationships
More than ever, with networking events on hold or non-existent, you must have a tight, viable pitch. Think of your elevator pitch, only on Zoom. You have a given investor’s attention for about five minutes. Can’t explain your idea that quickly? Then you are not ready to pitch.
You’re also much more likely to get a “yes” or at least a “tell me more” if you have a warm introduction to the person you are talking to. This means you know someone they know, or you have interacted before in some way, even if that is on social media. A pitch that starts with, “You don’t know me, but…” or the even worse, “I know you’re busy, but…” promises to be challenging.
One that starts with something like, “That was a great conversation we had on Twitter the other day” or “Alex referred me to you. He said our organizations may be a good fit to work together” has a much greater chance for success. If at all possible, get an introduction to your potential investor.
Better yet, get to know those who fund businesses in your space. Even if they are not a fit for your project, they may know someone who is and may know things you should do to prepare. When it comes to fundraising during a pandemic, it is often about who you know.
Tell Your COVID Story
The truth of the matter is every investor is going to ask you about your COVID journey and what your plans are to deal with Black Swan events in the future. Just as you can’t ignore the current world situation, neither can investors.
What have you done to adapt to the situation? Are you looking at the way your clients and customers are doing business and how that has changed? When it comes to a new normal, are you ready to pivot and work to overcome challenges?
The truth of the current fundraising climate is that you must change your fundraising strategy. Investors are looking for short-term profitability; innovation and disruption; a solid plan for the future; and companies ready for due diligence and close scrutiny.
But if you are ready, there is more funding available now than at nearly any time in history. Fundraising during a pandemic is far from impossible. It’s just different, and you need to make sure your company fits what investors are looking for.