By Draper Startup House
Startup fundraising is a murky process for entrepreneurs during the best of times, with the disruption of a pandemic, it’s no surprise that the process feels even more fraught. To accompany the launch of our new Ventures platform matching startups and investors, we reached out to our global network asking for the best ways to successfully get funding for startups in 2020.
What followed was a series of virtual panels that took us around the world to examine the current state of startup fundraising and where it is likely headed. The Draper Startup House Future of Fundraising panels included our in-house experts as well as experienced venture capitalists and entrepreneurs who have successfully secured startup funding despite the upset of COVID19.
Whether you are at the beginning stages of your entrepreneurial journey or an old hand at startup fundraising, we’re summarizing the best advice we received here to shed light on the future of fundraising and provide realistic insights and encouragement to both startups and investors.
The Road to Fundraising is Long, So Start Early
When is the right time for a startup to raise funds? If you’ve pinned down your business model, can demonstrate traction, and have your house in order, then there’s no reason to let the uncertainty of COVID19 stop you.
VC investor, Juliette Souliman, Chief Commercial Officer at Cred investments told us, “regardless of the time, fundraising is a very competitive and difficult process.” While she sees a hold on investing, for now, that doesn’t mean it’s the wrong time to start reaching out in an attempt to build relationships with investors. If a startup is looking for fundraising opportunities in the next few months then right now is the time to start because it is an extensive process and can take months to establish the right relationship. Investors are still very actively looking for ideas but the bar is higher especially with gaining capital and meeting demand.
“Be prepared for a really hard 6–12 months, have a good support group of other founders and focus on why your product is needed, positioning the startup as essential in this market as well as what real pinpoints you can solve” suggests Nitin Sharma, Founder of First Principles VC.
Changing Market? Adapt Your Business
If your startup isn’t quite ready for funding, the advice from our investor network is clear: take the time to strengthen your business model and adapt to the changing environment. While change can seem threatening, this is an opportunity to adapt and pivot. This advice is true whether there is a global pandemic or not — startups cannot expect markets to stay static, they must be prepared to adapt.
Pat Naranpat Thitipattakul, Investment Manager at 500 Startups told us, “during pandemic times I have seen lots of entrepreneurs become very very creative and it is something that reinforces what we believe. The teams we invested in are very passionate about what they do and they just don’t give up, they try to find ways around making their business survive so we have seen a lot of interesting pivots during these months.”
Many panelists recommended running campaigns around the themes of working from home: how can customers benefit from your brand or use your solution? Consumers are online now more than ever which can be a great marketing opportunity for some startups.
Prepare for What Happens to the Market After COVID19
“Everyone is anticipating the economy will open up again. The question is to really figure out what signals indicate in what ways the economy will open up. You want to position all your new investments and existing companies to ride that wave as early as possible and as early as you realize the signal” says Kshitij Shah, Principal at 3One4 Capital.
When it comes to investment opportunities, VCs aren’t just looking for companies that are right for the market now, they’re also looking ahead. As with all recessions, in the next five or so years there will be an economic up-cycle and investors want to be a part of that. Investors want their companies to become institutions with staying power. Companies that are prepared with a long term strategy can make VCs feel more confident in investing.
If your industry has been wiped out by the pandemic, that doesn’t mean you can’t still seek investment and grow. While nobody wants to be involved in an uncertain market, the question investors want to be answered is when your consumers will come back and what are you doing to prepare for that. For example, “ if consumer spending is going to come back how are you positioned to capture that? If travel is going to resume in November or December how are you positioned to capture that?” These are the questions Shah would ask a founder.
The Basics of Business Planning Apply More than Ever
Entrepreneurs on our panels who had recently secured funding reminded us of the importance of finding product-market fit and knowing what your go-to-market strategy is. Who will be your early adopters and how will you convince them to use your product? How will word of mouth spread?
Have a plan and adjust your runway ensuring longevity as much as possible. Timelines and launches are also important but be realistic about them. Throughout the process, there is going to be a lot of trial and error but it’s important not to panic and stay calm. There is always a solution even if you have to go through numerous trials and errors. If you believe in your project you should be willing to go through that.
“If you are raising right now, definitely include a slide on your pitch about the impact of COVID19, how you will overcome the situation, and how it’s going to impact your business. Potential scenarios, highs/lows and best-case scenarios. Definitely don’t bullshit investors and be 100 percent honest,” says David Adiel Baissa, Founder and CEO of YUMY.
Traction: What if you have no revenue to show? Should you still pitch to firms? If you are at the beginning stages and haven’t had much of a sales history one thing investors will need to know is if you have traction. Do you have letters of intent from corporations if you have no previous revenue? Do you have daily, weekly, or monthly active users? If you have nothing to show the answer is to wait until you have a demand for your product or service that investors can see corporations are interested in, or of course, revenue to show.
Teams: VC firms that are investing in early-stage startups aren’t investing in the company so much as they are investing in the team. Demonstrate to investors that you have the right combination of technical skills, commercial skills, and financial skills. Investors looking at new opportunities are also attracted to the size of the market you’re addressing. Of course, everybody wants a broad market reach, but if your solution is targeted to just one country, then it’s on you to show how deep the market is in that country.
“I really enjoy making complicated things and problems into easy experiences for the consumer,” said Madis Lehtmets, co-founder, CEO, and designer at Remato.
The Truth is in the Numbers
Investors are looking for companies with high growth potential, this remains constant. In these uncertain times, however, many investors are now becoming more risk-averse. Before they may have been willing to take risks on companies with little to no profit but after the economic downturn investors are looking for startups that understand money management and can measure and predict their ROI. There is a need to track important metrics and startups need to have cash flow and plan for 12–18 months of runway.
“Don’t pitch something that is already sinking,” said Christina Teo, Chief Builder at She1k “Be exceptionally realistic, especially with projections”.
When investors see a pitch deck with extreme exaggerations, they question the startup’s reliability. Investors understand that your business may have been seriously disrupted by the crisis, but if the numbers were not satisfying from the start, they’ll see through that. It is better to have a mature conversation and talk about different ideas and scenarios to adapt and improve than to blame the crisis for your lack of validation and traction.
As Nick Martin, Venture Partner at Draper Startup House pointed out, “Is it really a ‘COVID-sidence’ or are there really underlying issues and challenges?”
Startups Need to Negotiate and Engage
It is more important than ever for startups to engage and answer hard questions. Be prepared, imagine positive and negative future scenarios, and have the solutions for each situation. Investors want you to prove to them that you have thought these scenarios through so they don’t have to do it for you. Not only do founders need to answer the hard questions but they need to ask for help when needed especially during difficult times. The partnership needs to be transparent, open, and fair. It’s important to be coachable but not a pushover.
Urging founders to stand their ground, David Adiel Baissa, Founder and CEO of YUMY emphasized that, “ Even with investors, be flexible but don’t accept everything even if you’re desperate. It’s a long term thing like a marriage, don’t start on a bad basis at the beginning because it’s not going to go well afterward.”
So be honest about what you can and cannot accomplish. Good founders are able to have correct judgment and rationality and investors can see that. Even though there is a lot more caution for the future, with a strong team and a good product your startup can make it through these difficult situations.
Lastly, there is the X factor as Benjamin Chong calls it. The X factor is the type of team that has confidence that shines through. A team that will do whatever it takes to push through and solve any problem no matter what it takes because they truly believe in their product.
“When you ask them the hard questions, questions they may not even be prepared for; they engage with you and when they engage with you there is a passion, there is this ‘X factor’ that makes you think wow, that person is going to go somewhere.” Said Benjamin Chong, of Right-click Partner.
The Sectors and Startups Investors Are Most Interested In
While some industries are facing huge problems, others are ripe for investment and growth. The VC’s are ditching a couple of business models to focus on these more attractive sectors, for example, telehealth, education, and future of work (remote working, working from home). Remote work and people working from home have been shown to have great benefits and proven to be productive especially during this pandemic. It has given an opportunity for workers to show their effectiveness of working remotely. Tools and software that help consumers work from home are very attractive to investors.
Software telemedicine, health technology, and health-related businesses are also exciting for investors. What’s been problematic historically is the speed at which the health industry can work. What has happened in recent times is governments and politicians have realized they cannot fill medical centers with huge numbers of people so the rise of telehealth is essential. Lastly, companies who are able to sell through this crisis show investors they are worth investing in.
After COVID, investors are expecting changes in the consumer mindset: buyers will think more before spending and think of value rather than impulse. As Nitin Sharma, Founder of First Principles VC said, “In terms of value consciousness, in the next four to five years there will be a shift in value-conscious minds.” For example, budget apps and coupon websites like Groupon as well as group-buying are predicted to become more popular.
The kind of startups investors are looking for and are interested in are things that are a part of a consumer’s everyday attention. What they think of from the moment they wake up, what they use at work, how they’re entertained, and what services and products help people to take care of their families. Services and products that will be used on a daily basis are great opportunities for investments.
Startups Have More Options Than Just VCs
Getting your startup funded can seem like a mysterious process for first-time founders, but it doesn’t need to be this way. Guilliana Crivello, Head of Ventures here at Draper Startup House believes there’s never been a better time to disrupt the traditional VC model.
For the most part, what exists in the VC model as a whole is very much who you know and the connections that you have to get you your funding. Networking helps build connections and develop opportunities. Unfortunately, for a first-time entrepreneur in Chiang Mai, networking may bring fewer opportunities than someone living in California working on their third company.
What Draper Startup House has seen is the need for entrepreneurs to have more opportunities and better access to enable growth and development. Entrepreneurs around the world need help, especially right now amidst this global pandemic.
“The current VC model is not flexible. And so much to be done in terms of clearly aligning with what the startup is doing, business models are infinite but there is only one way of investing” Says Juliette Souliman, Chief Commercial Officer at Cred investments.
One change that is of great benefit to startup founders worldwide is the new readiness to dialogue entirely online. Even in the tech-friendly world of VCs, there was still an expectation of face-to-face meetings for startups serious about fundraising. While there’s still nothing like being in the room with someone and having their undivided attention, being forced to go entirely online may prove to be a democratizing force for founders far from Silicon Valley.
“Strategic partnerships; working with traditional players, family offices, or traditional businesses is also one thing which startups don’t see largely, this way startups can benefit and capture the market which is slightly untapped. This is something startups should really focus on”. — Said Rohit Bafna, Founder of 888 VC Network.
Despite not having a crystal ball to see the future, The clear takeaway is that fundraising post-COVID will be a no BS situation and competition will be more intense. While the world of venture capital has the benefit of being more formal and focused for startups, there are opportunities for companies to raise capital from other sources which might be of greater benefit. Draper Startup House will help match you with investments wherever you are in your journey. Our goal is to help entrepreneurs have better access to funding whether it’s in their local environment or internationally. Let us help you reach your goals!
“Do not be afraid to ask for help! Right now is the time to ask for help in every way, shape and form” -Christina Teo, Chief Builder at She1k.
To learn more about how we can help you on your journey click this link https://draperstartuphouse.com/ventures/