Ask a VC: Fundraising in the COVID-19 Era
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It’s a question on many startup founders’ minds: what does the current economic upheaval mean for companies trying to raise funds?
For insight, we went straight to the source. Our CEO and co-founder Waseem Daher recently sat down with Mark Goldberg, partner at Index Ventures, Ilya Fushman, partner at Kleiner Perkins, and Ali Partovi, CEO at Neo, to talk about what founders should expect in the fundraising world today. Excerpts from the conversation are below, and the full session is available to watch on demand.
Impact on VC investing
Waseem Daher: What do we think the impact of this is going to be on venture capital investing? I think specifically there’s a lot of debate about whether VCs are actually open for business, or if everyone is in a wait-and-see mode. I’d love to get your perspective on how investors are evaluating the macro conditions, and how your own investment framework has changed (if it has).
Mark Goldberg: We’ve been pretty active the last few weeks, but the caveat to that is it’s mostly been investments we’ve been thinking about for months, quarters, or years. So we’ve done deals, but I think it’s not representative of what might be the case going forward.
The biggest challenge, and I think the audience will empathize with this, is figuring out how to connect with entrepreneurs without meeting in person. So much of this job is personal, so much is the rapport you build between an investor and a founder. We haven’t figured out how to do that yet. We’re trying really hard. Zoom is an OK mechanism, I just yesterday met someone in a park and took a walk six feet apart.
I think the idea of doing an investment from start to finish in this shelter in place environment is something that we’re working really hard to get towards but has definitely been an obstacle.
Ilya Fushman: Yeah, I think creating that personal connection, which is frankly vital at every stage of investing, maybe more relevant at the early stages because there’s little data to go on other than the founding team – that’s probably going to be the critical question.
We’ve done a few deals, we just raised a $700M fund. We wrote two early-stage Series A or late seed checks out of that fund, both of those companies were companies we’d actually known before, and we met the founders before. The actual process was done over zoom. Those are a little easier to do, when you know the team and check size is reasonable.
I think there is another class of companies, which are maybe the Pilots or Figmas of the world. It’s a known company, it’s a known founding set, it’s a desired asset, and you will probably see strong inbound, especially in these times. At the end of the day there is still a lot of capital in venture capital.
Advice for companies who are actively fundraising
Waseem Daher: Eight months ago, no one could have predicted that this was going to be where we are now. There were companies that had what they believed to be a solid path to their next round which they intended to do sometime now, who might suddenly find their plans in jeopardy. Do you have any advice for a company trying to actively fundraise at the moment?
Ilya Fushman: I’m sure some of this is things people have already done, but I’d say, one, just extend runway in any way that you can. Two, you have to have a long-term outlook. As we invest we look at ten years for some of these more significant companies to really get to maturity, and that journey will have ups and downs.
So I think it’s about finding sources of capital that will take a bet now, and that may mean extending the last round, that may mean doing a convertible debt type round, that might mean finding non-dilutive or different sources of capital. We can have a whole different conversation about the PPP loan program, that’s obviously one facet, but there are many ways to potentially do that. And I think one thing is to go back and rely on some of these prior relationships. Go back to your investors as well, and see if there’s an appetite to extend runway.
Ali Partovi: I’ll say two things, one is treat it as a search task. Don’t think of it as, ‘I’m talking to a VC, somehow I gotta change their mind, convince them to invest in me.’ Think of it as, there are VCs out there who will love what I’m doing, if only we saw each other. By the way, this is advice I would give even if it weren’t the current situation. Raising money is more a search task. And if you’re sitting with someone who’s not getting persuaded, don’t waste either of your time. Think of it like dating: you can’t convince someone to fall in love with you. Maybe they’ll introduce you to someone else!
The other thing is, be agile and adaptable. Figure out how the current environment advantages you. And as much as it might hurt you, maybe it hurts your competitor more. Maybe you can cut costs in a way that others can’t. Maybe you have to pivot a little bit, but don’t just stay the same and be like “oh, what happened to me.” I also say that all the time: you always have to be agile.
What to expect on timelines
Waseem Daher: Compared to a typical fundraising process a year ago, should founders expect changes around timelines? Is the process moving slower or faster? And is there any lever founders can pull to influence that timeline?
Ilya Fushman: Overall, my advice to founders is that in a world where you can’t meet someone in person, where you can’t have an interactive meeting like you could before, the bar to clear as far as data readiness, the presentation, has really just gone up.
To write a significant check over Zoom, there has to be something that’s incredibly obvious in the business. Typically you suss that out through an iterative process of interacting with somebody and building that relationship, and you just can’t really do that any more – or that iterative process stretches over weeks.
The founders that I’ve seen do well are the ones that very clearly hone in on what’s magical about the business, what are the key levers, what truly matters, and present that in a very obvious way, so we can glean that information. And those processes, they would have taken a couple weeks, they probably take 3-4 weeks now.
Mark Goldberg: I agree with everything Ilya said, and one of the challenges that a lot of folks on this call are probably experiencing is that you can end up wasting a lot of time speaking to VCs who are never going to invest in your round. They’re just going to ask for more and more information.
So I think one of the pieces of advice I’d offer would be to really try to pin an investor down to a timeline, and to make really sure that you understand the checkpoints in that person’s process.These are a moving target even at Index right now, but I think you want to be careful of wasting time with investors that are really never going to actually write a check.
Ali Partovi: I have said for years to all entrepreneurs that timing is critical to any deal. I used to be totally unaware of this myself when I was younger, what a huge amount of the outcome of your deal depends on timing. It’s always a good idea to try to drive a tight timeline, try to build momentum among a group of investors on a very structured window, rather than being continuously fundraising week after week, month after month. I think that’s absolutely still true today.
Basically, it means you have to do more lead work. You can’t just say, I’ll make 7 pitches and I’m going to get a few offers. You need to do the triaging up front, which of these VCs are cutting back, which are being more active, so when you go out there you can get it done rather than having it drag on.