Fundraising Comes to a Standstill
COVID-19 brought social distancing, lockdowns, and changes to the basic operations of many businesses and industries. These changes are likely going to alter startup funding trends and the predictions made for 2020.
One of the most fundamental questions is how businesses are going to be affected by these changes in the future, and how both venture capitalists (VCs) and startup founders will react to these changes.
According to TechCrunch’s 2020 DocSend Startup Index, all indications were that the momentum gained in February 2020 for investor demand was high and that there was plenty of capital available for funding. The figures showed that 2020 was going to pass the 2018 record. During the week of February 10, there was a 19% increase in demand for venture capital, compared to the same period in 2019.
Startup Founders Put Their Plans on Hold
Even though there has been increased interest from VCs for pitches from founders in April 2020, data shows that startup founders aren’t responding.
In January 2020, the real-time data showed a huge leap in founders pitching their products to investors. All indications are that startup founders are continuing to focus on their businesses, albeit from home, but are adjusting their business models to adapt them to the new reality.
Other reasons that may be causing them to be cautious about seeking venture capital may include changes to the valuation of their startup, or they could be erring on the cautious side, working with their current investors rather than seeking capital from outside.
It is normal for businesses in their early stages to be more vigilant as they are more vulnerable to external forces and their effects. The uncertainties they currently face include cash flow, and which services or products are most likely to be in demand as the pandemic’s effects start to ease off.
Investors Still Have Capital to Invest and Advice to Offer
Investors only bowed out for a brief period in March, adjusting to the pandemic’s initial shockwaves, but their interest quickly returned and they are more than ready to invest.
This impact of the intensifying crisis initially forced VCs to focus on the effects it was having on their existing portfolios. However, it is almost certain that the money available for startups has not dried up. Even so, VCs and angel investors are keeping an eye on the marketplace for investment opportunities.
Meanwhile, VCs have also been studying the new business landscape as it is developing. Their main concerns will be on how business models may need to be adjusted, and how customer needs will adjust their demands for services and products.
Many of these investors have years of experience, and many venture capitalists will now need to offer support to the companies they are willing to invest in. VCs are now placing their emphasis on new issues to prepare for the tough business climate expected in the coming months, including a shift in focus from growth to a focus on cost-savings that will increase profitability for startups.
Turmoil and Its Effects on Entrepreneurship
During these trying times, entrepreneurs have shown that they don’t easily bow down to unusual external circumstances. Examples of how some have adapted and flourished can be found everywhere from fashion designers who overnight started to produce masks, small grocery stores that quickly adapted to become online stores, and manufacturers who innovatively started to create ventilators for the health industry.
At the same pace, VCs are pursuing their initiatives to provide funding, either for existing startups or for new ones bearing new ideas borne out of the need for social distancing.
Even though a lot of governments worldwide have pledged a lot of capital support, this financial support is far more challenging to get than promised. With the cost of capital expected to rise, VCs are looking to support and nurture innovative businesses with the ability to adapt, and startups.
About the Author
Luigi Wewege is the Senior Vice President, and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an Instructor at the FinTech School which provides online training courses on the latest technological and innovation developments within the financial services industry. Luigi is also the published author of: The Digital Banking Revolution.