Faced with risk averse investors and unreturned calls, here’s how founders managed the economic crisis.
When it first became clear to the public that Covid-19 had breached U.S. shores, Audra Gold, co-founder and chief executive of Vurbl Media, was raising her first round of financing. Suddenly, business ground to a halt and fundraising became impossible.
"Our lead investor all but disappeared so I was left on my own…everyone was worried about surviving and very few people had time for anyone else," the entrepreneur recalled. Luckily, her first investor had just wired over the money before California, where she is based, issued stay-at-home orders. But the angel and venture investors who had previously expressed enthusiasm about investing suddenly stopped communicating.
"These are people I've known for years. Angel investors weren't returning emails or returning calls. So I'm sitting here with enough cash to survive for three months, and no one will take a meeting," she said.
Raising capital is difficult even under the best of circumstances. But during a once in a lifetime pandemic, the task can be herculean. While U.S. investment activity reached nearly USD 148 billion in 2020, according to PitchBook, only slightly below 2019 numbers, much was concentrated in the second half of the year.
Fundraising effectively stopped in the second quarter, forcing companies, including startups, to cut spending, pivot, or find creative ways to get by.
The pandemic had an uneven impact on different industries. While hospitality or travel faced a dour outlook, founders in industries such as healthcare and remote work solutions were unaffected or saw an uptick in interest.
But anytime investors are cautious, founders suddenly have to be much more careful about cash burn. That was the situation Freightwaves found itself in in early 2020. Craig Fuller, chief executive and founder of the supply chain and logistics data firm, said the company had just started their fundraising roadshow in January. The reception was much cooler than expected.
Covid-19 was only in the background at the time, but investors were cautious in the wake of WeWork's failed IPO, as well as Lyft and Uber's IPO flops. Even though Freightwaves was growing and supply chain and logistics were in the spotlight during the pandemic, Freightwaves still needed to reserve cash and make some cuts, Fuller said.
"One thing we discovered was that investors were uncomfortable with high burn businesses. If you want to take capital, you need to cut burn and see a path to profitability within six months," the entrepreneur said. The "risk on" environment meant that investors suddenly flipped from a "growth at all costs" mentality to one of "you need to have a business that is fundamentally sound and has path to profitability," he said.
Freightwaves ended up cutting aggressively and laying off staff to reduce cash burn. "It was a dark time for a founder….it takes a toll," he said. But the sacrifice paid off. The company had originally looked at potentially going public in 2023 or 2024, but between the spending cuts, ramped up interest in the logistics sector, and favorable public markets, Fuller said he believes the company could look at an offering as early as late this year or early 2022.
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Cyabra founder Dan Brahmy also emphasized the importance of having sufficient cash reserves to get through lean times. Cyabra, which uses AI and data analytics to identify misinformation and disinformation online, saw a surge in demand for their service in January and February. Yet funding was a different story, Brahmy said.
"From February until July, the investment world – especially venture capital and family offices – I don't want to say that they froze but the process just became three times longer," he said. Investors took their time because they weren't sure what was happening, he said. Funds were gauging the impact on their limited partners. The usual time that it takes to raise funds doubled from three to six months to more like six to 12, he said.
"I personally know a bunch of founders who are CEOs and CTOs of early stage startups that had to close their businesses because they didn't have enough runway to go through the storm, almost like having enough fat to survive... We were lucky we had money in the bank and customer traction," he said.
With in-person meetings largely out this past year during the pandemic, Zoom and other online tools filled the void. But investors and founders said online tools were a double-edged sword – simultaneously making meetings both more difficult and more accessible.
The relationship between an investor and startup founder can be a close, long-term relationship. There's generally a long getting-to-know-you period. For early-stage investors, going virtual made that more challenging.
On the other hand, Zoom also made more meetings possible. Because no one was traveling, investors could be more accessible for calls with prospective investors.
"Zoom does allow a lot more time for diligence sessions and quick confirmation calls. In the past, diligence would typically not start until you had an in-person kickoff. With virtual meetings, the entire deal calendar can accelerate," said Matt Thompson, senior vice president at Skyview Ventures.
With virtual meetings, the entire deal calendar can accelerate.
Matt Thompson, Skyview Ventures
Tech Coast Angels, an angel investments club that Thompson is also a member of, invested in more deals in 2020 than 2019. That may or may not be a good thing. Time will tell how effective due diligence is over Zoom.
"The real test if this Zoom experiment in investing worked will not show up for several years. Will investment returns be higher or lower from investments made during the 2020 "vintage," he said.