What Startup Investing Looks Like in the Next Six Months

We talked with several experienced venture capitalists to get their take on what founders should expect in the next several months as they’re fundraising.

First, venture firms and venture investors will have to prioritize their portfolios, both with time and with capital. Second, as the bear market leads to revenue expectations and market multiples both compressing, investors’ expectations for the risk-adjusted outcomes for investments will decrease and therefore the bar for new investments will become much higher. Taken together, we are likely to see an environment in which only the best ideas will get funded. While that might make the fundraising journey difficult for some founders, it will also allow winners to be crowned more easily as non-market leaders are unable to access the capital markets as easily as they have in the past. 

Mary D’Onofrio, Investor at Bessemer Venture Partners

Lolita Taub, Chief of Staff at Catalyte and Investor

Founders need to show adaptability and that they are thinking about the long-term impact of current events. What is next and how does that impact their business and its strategy. Furthermore, it is important to realize that rounds will take much longer to close and this needs to be baked into fundraising plans. Now is not the time to optimize valuation, but to get cash in the bank and focus on solving pain points that add real and tangible value.

Stephanie Zepeda, Senior Associate at Arbor Ventures

Pre-seed/seed fundraising will probably be the least hard-hit, as many funds in this space will still be writing small checks. Early stage and later stage deals will take a bigger hit, mostly because the diligence process is typically more involved. We, for example, are still TBD on whether we will be writing checks to companies we haven’t met in person.

A lot more bridge rounds will come up, but it’s unclear how many of them will get done. Insiders are likely to come to the rescue of companies that are low on cash, but will also recommend enacting cost cutting measures to extend runway.

To that end, there will probably be a renewed focus on fundamental metrics for different stages (i.e., a certain amount of revenue traction for a Series A/B/C); some funds may have been willing to go in earlier but with budgets tightening we will want to see real proof of revenue and stickiness before we pull the trigger.

Sarah Millar, City Light Capital

What is the case for investing in technology at the earliest stage besides the fact that returns are the best and investors are seeking a long term game now? Early stage pre-revenue tech startups become in relative terms less risky. At the early stage, risk doesn’t change much in absolute terms but changes dramatically in relative terms. If you at normal times evaluate a pre-seed startup risk to be, say, 100x higher than that of a later-stage company, at the time of crisis this could become only 20x. This of course assumes the crisis is bounded in time. If the crisis is long-term other factors come into play, like sharply increased funding risk.

Pre-revenue startups have zero exposure to market, and generally benefit from crises, because they can get cheaper workforce (this assumes employees will still want to join a company with financing risk). If you expect the crisis will take x number of months, and the startup has >x runway, you know it will survive. There are almost no other variables except in the Coronavirus instance, we don’t know x number of months yet.

Nisa Amoils, Partner at Grasshopper Capital

Elizabeth Yin, Partner at Hustle Fund

As early-stage digital health investors, we’re watching an incredible dichotomy unfold—some of the greatest macroeconomic uncertainty we’ve ever seen, alongside urgent, enormous demand for connected healthcare solutions. With record levels of committed capital in the coffers of VCs and PE firms, investment activity may be tempered in the short term, but we expect to see a flight of capital to quality with competition for the best deals. And certain sectors—like digital health—are uniquely positioned as they play a mission-critical role in the pandemic response, and the strongest companies will emerge shaping the future of healthcare delivery.

Megan Zweig, Director of Research and Marketing, Rock Health

As a general trend, investor sentiment for startup investing moves in tandem with broader economic sentiment. With uncertainty around the timing of an economic recovery, founders are likely to experience slower fundraising processes.

That said, the specific conditions we find ourselves in mean that startups in particular sectors may find new opportunities to scale, that did not necessarily exist before. We may therefore see more funding being allocated towards startups that are poised to benefit from these trends.

As challenging as it is, navigating the coming months will be important in illustrating a founder’s capacity to deal with uncertainty during highly testing times.  

Diya Sagar, Investment Professional at Lupa Systems

Investors want to see founders focus on their fundamentals and key milestones needed to hit in order to excite them. While sales pipelines may slow down, there are plenty of other company-building things that can be done. Have a plan and be meticulous in executing.

You’ve also got to find investors who believe in your startup and are willing to support you NOW, not in 6 months. There are also investors with plenty of dry powder who will look at this time as opportunistic and will search for deals. Try to identify those investors who align with your vision and will be strategic partners. 

Milena Bogdanova Bursztyn, Venture Investor at Germin8



The Switch Editorial Team.

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