Q&A: Fundraising and COVID-19

When the pandemic first started making an impact on our lives back in March, I was scheduled to meet with a team of MBA students out of Tel Aviv University. These students were working on a project with a real company, helping them map the milestones and strategy required to be an attractive investment opportunity for venture capital. At the time, things were already in flux and there was no clear path forward. Elana Benedikt created a good summary of our interview and I had intended to post it here…

Last week I participated in an open Q&A session for the MassChallenge Israel 2020 cohort to discuss seed stage investing. While some of the questions were the standard fare – what is the difference between Seed and Series A? What is a pre-Seed? when should we approach angels vs micro-funds vs venture funds? etc. – there were definitely several questions directed at the world post-COVID19 and the impact on venture capital at the Seed stage.

I went back to the summary Elana had created and found that it was mostly still very relevant and reflected the conversation from the MC panel last week. So I am (finally) sharing it here. Thank you to Elana for the summary. Thank you to MC and my fellow panelists for the great session.

At the time this blog post is being written the world economy is struggling with the current repercussions and difficulty of future predictions during the COVID-19 pandemic. Large corporations, small businesses, and investors are dealing with new dilemmas. In light of that, we wanted to lay out the key aspects of the Israeli venture capital (VC) environment, with its collaborative nature and emphasize important markers for early success, as a service to early stage ventures. We had the opportunity to learn more about Sapir Venture Partners value set and its approach to finding startups and entrepreneurs that show the most potential to impact the world. We set out to hear about how the COVID-19 pandemic is affecting the investment sector and to gain insight into securing future investment. – Elana Benedikt, April 28, 2020

What Can You Tell Us that Makes the Israeli Early-Stage VC Environment Unique?

In the Israeli ecosystem, early stage VCs are very collaborative. Prior to COVID-19, VCs and entrepreneurs would attend many conferences a year in person, exchanging contact information with each other, and establishing relationships. These events are how most early stage VCs hear about new startups in the market and how entrepreneurs meet investors.

Having a warm introduction from a trusted source or connecting at an industry event, is much more impactful and valuable than sending a cold email. Establishing a relationship with a VC prior to sending a proposal is important for an investor to gain insight into the entrepreneurial team and company.

Successful entrepreneurs develop relationships with many different investors and maintain understanding of the specific type of investment that each VC specializes in. Entrepreneurs need to conduct extensive due diligence to truly understand the business model of each VC and the optimal way of approaching them. Each startup business development team member should be networking, actively seeking these investors, and developing meaningful relationships. Once these relationships are established, entrepreneurs need to be selective in maintaining deeper relations with the key investors in their specific industry and who invest at the relevant stage for their company. Additionally, entrepreneurs should understand the general rule which states that they will be “giving up” approximately 20-35% ownership per round in the early stages.

What is Your Viewpoint of the Early Stage VC Market?

An important fact to keep in mind is the number of opportunities VCs receive per year. For larger VCs it is approximately 1,000/year. Most funds invest in only 5-10 startups a year, and most will assume a 3-year deployment period. Each partner of the firm will personally be active in 5-6 startups at any given time.

Additionally, early stage investing involves significant collaboration between VC firms. This interaction multiplies the size of the network, amplifies ideas, and includes more people adding value. Most early stage rounds will have a single lead investor and other VC firms join as followers but can still contribute to the success of the company through a collaborative approach.

How has the Venture Capital Sector Been Impacted by the COVID 19 Pandemic?

Many investors would say that they are actively looking to invest, even though they may temporarily lack capital, or they prefer to preserve capital for their existing portfolio companies which may require more support. At the early stages we are seeing deals getting a 20% evaluation cut since March 1 2020, and that can be even higher for Series A or Series B companies. Most investors are focused on companies which they had already been engaged with prior to March 1st. Once these deals close, it is difficult to predict how future deals will be initiated and diligence will move forward with limited real-world contact.

What Should Entrepreneurs Do During the COVID 19 Pandemic?

Prior to the COVID-19 pandemic, investors and entrepreneurs could attend meetings and conferences in person. Today they should be attending as many online networking events as possible, so as to stay relevant and establish relationships with potential investors.

The first step to address during the crisis is to make sure you have enough capital to survive in the short term. Once this is accomplished, secondly focusing on R&D and further developing innovative technologies and solutions. Lastly, you should be prepared to take advantage of the upswing expected when the markets return.

Founders need to be strategic during this time and continue moving their companies forward wherever possible. Despite the challenges. If they can’t be out closing sales then they should focus on R&D and learn from their customers by doing market research to better design their solution. By pivoting away from focusing only on sales, these entrepreneurs can showcase their progress and path to profitability to investors once investing increases again.

A Few Final Quick Tips

If the team has received an offer for investment, there are a few important factors to consider, especially in a time of crisis. There are investors willing to take advantage of entrepreneurs during this difficult time, for example by requesting a larger proportion of equity than they would in a more stable market. Thus, it is imperative to have experienced professionals fully review the term sheet before accepting one from an investor. Another recommendation is to request to be put in contact with other founders in the investor’s portfolio. And reach out to them independently. By doing your due diligence, you’ll be able to identify the best potential fit with an investor and turn down offers that may be challenging partners in your efforts to realize your vision.

What should I do during a Pandemic?

A month ago we sent out a letter to all of our portfolio companies regarding the novel Coronavirus pandemic (COVID19). Our intent was to show our support, offer practical suggestions and make ourselves available to help them wherever needed.

It is hard to believe that it has only been a month, but the world truly feels like a different place. We recognize that the current situation, while improving, is not going anyway soon. Despite the optimistic voices around the table or on the news. So, as we look to develop long-term strategies and new ways of doing business, we went back to review what we wrote at the time.

Here are some excerpts which we thought are still relevant:

The world is a different place than it was when March 2020 began. We hope that you and your families are safe at home, with plans to stay there until we can overcome this pandemic. I wanted to take this opportunity to share our perspective on the start-up ecosystem and share updates from SapirVP.

I am sure you have all seen the famous “Sequoia letter of 2020”. In a step which mirrored their approach to the downturn of 2008, the experienced firm shared their perspective and recommendations to their portfolio companies. These are good insights and valuable recommendations which I suggest you consider for your companies. The full letter can be found here.

While we are hearing other voices that do not completely align with Sequoia’s, we believe the following:

1. You need to prepare for the worse-case scenario.

2. You need to take advantage of this situation to enhance every aspect of your company.

To break this down to practical considerations: Regarding #1 the assumption needs to be that there will be significant, and potentially long-term, market disruptions on all fronts – customer interest, supply chain and fund raising are the most critical to an early stage venture. Regarding #2 – this is the time to refocus internally on product development, learn the voice of your customer through interviews and position your offerings for better market-fit in a changing world.  We are forced to stop, take stock and adjust.

This is also an opportunity to make improvements to your team – trimming (only) where necessary, cutting those who were not pulling their weight and hiring great talent that was hard to come by just a month ago. Of course, maintaining a positive culture is critical. Our approach has been to frame these steps as a way to boost the company and rally the troops to your mission. Protecting your employees as much as possible (safety and financially) is a solid way to lead by example. Choose to maintain a positive attitude and seek out the opportunities this situation has created.

These times call for swift and decisive actions to preserve what you have built while positioning your company as one of the few still standing, prepared to take advantage of the world post-Covid19 impact.

We all need to adapt. SapirVP remains engaged in evaluating new opportunities and closing investments to which we had committed before the world went into lockdown. But we are also reevaluating investment strategies so as to provide these companies with the best starting position to weather the storm.


Stay safe. Stay healthy.

BBB

Bring Back Blogging.

These are different times we live in. New experiences and new challenges, which bring with them new opportunities. We are forced to stop our lives and reconfigure. This is probably a good thing overall, but the impact will be meaningful. While many focus on the negative, there is also light shining through, highlighting the positive aspects.

I am trying to do what I can during this time. First for my family, and then our portfolio companies, our investors, our local community and the overall ecosystem. With people more available and interested in consuming content, I saw this as an opportunity to begin blogging again. In the spirit of @pmarca in his recent post, I wanted to get back to the feeling of building something again.

Initially we will be digging into some of the ideas and the thinking that we have been sharing in smaller conversations or online workshops. As the content develops and the world continues to adapt and reshape, I expect the content here will do so as well. Hopefully, we can expand our contribution to the ecosystem through this medium.

I look forward to your feedback.

Stay healthy.