There’s a lot of talk, argument, and misinformation flying around about whether or not investors are still writing checks to startups.
On one side of the argument: No. It’s an incredibly stupid time to be raising money. Investors are hiding under mattresses along whatever cash they’re still holding on to.
On the other side: Of course! The savvy among the investor class are ready to hear pitches from anyone with Powerpoint and a Zoom account.
The answer, as usual, lies somewhere in between.
Over the last month, I’ve been tending to the survival of my own company as well as that of a few other startups I advise — big startups, small startups, some of them brand new, others much more established and healthy.
During this time, I’ve talked to venture capitalists, angel investors, private investors, lawyers, accountants, bankers, serial founders of companies that have exited, first-time founders of companies that haven’t even launched yet, and dozens of other people with hands-on roles in the survival of their business.
The problem: No one knows anything yet
I’ve been an entrepreneur for over 20 years and I’ve seen some crazy shit, but nothing like this. I’ve built companies through the Great Recession, through 9/11, through the dot-com bust. Sure, there was fear, there were obstacles, but the impact of those events at least made sense.
The impact this time is still a big, ugly, hairy question mark. Long story short: The world just… stopped spinning in March. It’s been more than 30 days since entire sections of the world’s population went into isolation, and we still don’t know how or even when we’re going to emerge.
So to speculate one way or the other as to what the future is going to look like — that’s probably ill-advised. You take it day by day, which makes it very hard to think about investing in the future.
The case for raising money right now
A founder came to me last week with a solid case to be made for raising money now. Like, right now.
I’m in a position where I need to at least consider moving from bootstrapping to seed funding sooner than I had planned. My product directly enables folks who are trapped indoors. I have sworn up and down that I would not kick into funding mode until I had my core market supported by the product. But now, if I were to get some seed funding fast enough, I would be able to help more people in short order.
First of all, this is the right way to think about outside funding in any climate, but especially in the current climate.
VC firms are going to be even tougher to gauge
If you already have relationships with investors, then yes, now is the time to activate investment. If you don’t already have these relationships in place, it’s not impossible, but it’s going to be more difficult than usual to figure out what “maybe” means.
When you’re raising money, you want to hear “yes,” of course, but when you don’t hear “yes,” you want to hear “no,” so you can move on. The trouble is, both “yes” and “no” are rare. Investors have a million different ways to say “maybe,” and right now they have one big, ugly, hairy reason to put you off indefinitely.
This does not make them bad people. Investing is built on trust and relationships. These relationships take time to build. Right now is a shitty time to try to build a relationship.
Every single VC investor I’ve talked to has said the same thing: They are indeed doing deals, but they aren’t closing or even pursuing closing with any startup with which they don’t already have a relationship. They are all taking meetings, even encouraging folks to set up meetings, but they are likely not going to put new money to work on new ventures until at least Q3.
These investors are shoring up their current portfolios, keeping their powder dry to save the startups they’ve already invested in. This is especially painful for VC investors, as the Paycheck Protection Program excluded a lot of venture backed startups.
VC investors also have investors, and the ones who were in the middle of their own fundraises likely found that the spigot got turned off. That’s also going to impact VCs harder than other investors.
Angel and private investors are going to work off intestinal fortitude
Some stronger angels and most private investors (i.e. rich people) are on the opposite end of the spectrum. While VC firms invest all of their money in startups as their business model, most angels and private investors usually just invest part of their money in startups as diversification.
If the majority of an angel or private investor’s resources aren’t in startups, they’re probably in a better position than the VCs. And the lack of VC competition is allowing angel and private investors to get their foot in the door with startups they might have been stopped out of before.
But these are still scary times. Like I said before, the main difference between this crisis and some of the others we’ve seen is we don’t yet know the impact, the extent, the bottom.
It will come down to the intestinal fortitude of the angel or private investor you’re talking to. And that’s something you’re going to have to judge on the fly. They may want to do the deal, but will they have the courage to write the check?
Watch your equity
In some cases, investors are bottom fishing — they’re taking this as an opportunity to get more equity for less cash because they know they can. I’ve heard this happening anecdotally more than once, and there isn’t a lot of recourse. Investors have the upper hand. You can take their money, or you can take no money. If an investor can indeed stroke a check, there’s very little competition.
Be careful. And don’t go after money you don’t need immediately.
No one expects any improvement until at least Q3
Like I said, no one knows how this is going to end, but everyone had an opinion. Those opinions were all over the map, but one thing that was consistent is that Q2 is going to be disaster.
That said, the majority of investors, bankers, and financial analysts I’ve talked to expect the economy to start to turn around in Q3, and maybe accelerate that recovery into Q4.
Fund your company with revenue first
Whenever the economy does recover, remember, it will recover. It always does.
I’ll say it again, the right time to seek investment is when it’s absolutely necessary to accelerate growth, not spark it. My advice is — as it always will be: Go revenue and customer first, keep more equity, and build a strong and lasting foundation for the company.
This will not only give you more leverage when you do seek investment, but if you can prove that you can generate revenue in this environment, you probably won’t need outside investment at all.
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