In spite of all the doom and gloom in the media, founders continue to raise money and convince VCs to write checks. It’s happening every day, but success requires new strategies and company milestones. Recent customer traction, relevant market focus, and fiscally responsible internal operations areas are three key themes that founders must address when they look for investments now.
There’s no question that it’s a much tougher environment today than it was two months ago. Many startups will continue to run out of money and shut down. Investors are asking for steep discounts. They’re being aggressive in their term sheets. However, many founders have pivoted their fundraising approach. They recognize that the requirements have changed and are aggressively pursuing growth to convince investors that the company can thrive in the current environment.
At DataTribe, we combined our proprietary datasets and insights from other investors to understand how some founders are raising funds while others cease operations. Showing potential no longer gets you a seat at the table. Investors want proof.
- Has the company closed new sales?
- Have existing customers renewed?
- Are existing customers buying more?
- Has all this happened in the last 90 days?
Founders who can answer “yes” to all of these questions are likely to successfully raise capital. Demonstrating how a product is and will be needed in the new remote work environment and showing that customers are buying it are key to fundraising today.
The effect of the coronavirus crisis on startups in the technology industry is not uniform. Some sectors, such as cybersecurity, are proving resilient and continue to show deal activity at all stages (seed, A, B, C, etc.). Demand for cybersecurity products remains relevant (arguably more so today), and facilitates growth and customer traction.
Other companies are making significant product pivots or adapting their engagement model, successfully, to account for the new scale of remote work. In contrast, IT Services, consumer electronics, and advertising are facing extremely difficult times for raising capital as demand for their products falters in the coronavirus economy.
Financial runway is especially important during economic downturns. Aggressive founders are finding ways to take advantage of resources that help extend their runway in these uncertain times.
Many are opting to partner with accelerators, universities, and venture incubators, in addition to applying for U.S. government-backed Paycheck Protection Program loans (a component of the March 2020 CARES Act). By taking advantage of investors such as accelerators, founders receive more than just money. They often get legal, finance, HR, PR, and recruiting help for free. This not only helps extend their cash flow. It allows them to focus on selling existing solutions or pivoting their products to reach new customers and onboard them remotely instead of face-to-face.
Successful founders have rearranged their company’s story to demonstrate they have extended runway, managed productivity, and closed sales with a relevant product during this trying economic time. They are leading the conversation with a common narrative—”Our product is now a critical must-have in the new normal”—and have the sales to back this claim. Annual recurring revenue, annual contract value, and customer referrals are still very important, but they are not the leading indicator for VCs today.
Finally, these founders understand that funding rounds are historically discounted 10%-25% during economic downturns and are adjusting valuations and expectations from the start. This accelerates the investment conversation.
Michael Janke is cofounder and CEO of DataTribe, a startup incubator that invests in and co-builds the next generation of cybersecurity and data science companies.