Covid-19 has put investors in an unforeseen crisis mentality. How can startups from various industries and at different stages adapt to fight the cash crunch?
Covid-19 has drastically shocked the economy and startups are not spared from the ripple effects. Most investors have acclimatised to support existing portfolios—but some the exact opposite, diving fiercely into untapped opportunities presented by the pandemic. No hard and fast rules define investor behaviour, but there are some guiding clues startups can leverage to maintain or even grow capital through an economic depression. Mark Shmulevich, Senior Vice President of tech startup, TAIGER, shares insights on startup fundraising for the 2021 Q1 issue of the SID Director’s Bulletin.
Two factors may ease capital raising
A major opportunity for startups is realised through understanding that investor sentiments are multifaceted. Covid-19 presents just one factor dampening investments, but two other strong factors may achieve the contrary. One of such is the acceleration of digitalisation that put technology companies in favour of getting startup funding and growing. Across industries like healthcare, education, gaming, and retail is a rapid shift to digital. Investment bank UBS estimates that the market for enabling digital technologies like artificial intelligence, 5G, or augmented/virtual reality will grow 10 times in the coming decade. Cyber security, automation and fintech are here to stay, too, as businesses shutter physical storefronts and digital alternatives burgeon. Secondly, with low-interest rates and a close to all-time-high stock market environment, diversified funds, individual investors are seeking startups as an alternative asset class. In fact, startup funding deals in Southeast Asia have grown by 59 per cent in the second quarter of the year compared to the same period a year earlier.
A struggle for early-stage fundraising
Silver lining aside, the venture capital (VC) space globally is comparatively stirred, with the number of VC deals in the US falling around 20 per cent in the first half of 2020 according to PwC and CB Insights. In particular, early-stage fundraising is more challenging. In the third quarter of 2020, Crunchbase estimates early-stage funding globally to be down 18 per cent, while late-stage funding is up by 24 per cent, year on year.
Reasons for this are varied. For one, activity sourcing and evaluating new startups are down to minimise pandemic downsides for existing portfolios, and ultimately, to the fund. Business meetings with entrepreneurs are also less optimal with restrictions on travel, which can be critical to close the deal. Startups need to mitigate this deftly by easing communication barriers through extensive research on the VC and existing portfolios. Demonstrating business-readiness in the post-Covid world—such as by allocating capable people on the ground in local markets and creating a digital-ready distribution model—further contributes to bolstering investor confidence.
Collaborative effort between investor and startup
Ultimately, understanding the changes in investors’ mentality and priorities post-Covid can be a game-changer in raising the needed startup funding fast. Investor rationality and caution triggered by the uncertainties of the pandemic are only natural. In preparation for the forthcoming economic uptake, entrepreneurs should continue to pre-empt investment approaches and fine-tune product offering types. For now, startups must prove their resilience even in such a climate and prioritise a path to profitability. VCs are still looking for the trillion-dollar potential, but lean businesses that can handle long periods of low demand are more attractive now.