Surviving Capital Raising During Marketplace Disruption From COVID-19

COVID-19 has wreaked havoc on financial markets around the globe, which presents a formidable challenge for startups when it comes to raising capital.

While investors generally hedge risk during uncertain and unpredictable times, the current financial turmoil doesn’t automatically mean the game is over for fledgling companies. It does, however, mean that entrepreneurs are going to have to think more strategically about how to win over wary investors.

With several months of dealing with the pandemic already under our belt, many companies have been able to quickly shift operations to minimize fallout. In fact, even investors are taking note of the operational shifts that are now causing new innovations to rise out of the ashes from the tenacious and persistent startup community.

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In essence, while the demand in some sectors may be on pause, the aggressive need in other sectors is strongly on the rise, especially as entrepreneurs are rolling out contactless technologies, health and safety solutions and even consumer products and goods that allow people to better enjoy their time at home.

That’s why even in the midst of a recovering economy, believe it or not, startup fundraising is still very much thriving. Yes, it’s true that VCs, angel and even retail investors are still very much interested in funding “the next big thing.”

Interestingly, most savvy investors also understand that downturns can often result in some of the most lucrative opportunities that they may encounter. Historically, some of the best fund performances occurred between the onset of a downturn and the early stages of the recovery. The 2008 financial meltdown, for instance, presented opportunities to invest in companies with disruptive innovation like Venmo, Airbnb and Uber – which are all now leaders within their respective industries.

When you consider current global conditions, there are still many great startups innovating in ways that will meet the emerging demand for health and safety solutions or even the demand for “creature comfort” solutions needed at home. Moreover, any early stage enterprise delivering a solid offering that will be relevant even after the environment stabilizes, will continue to be a formidable contender in the marketplace for receiving investment funding as well.

In fact, online accelerator programs have recently provided virtual demo days that bring together 100s of VCs and private investors who are still very much interested in funding current and future advancements, with entrepreneurs continuing to raise millions of dollars in capital from these such events. Outside of virtual accelerators, some conferences are going digital, too.

This shift to a remote financial raising format has also leveled the playing field for those who don’t live in Silicon Valley or New York, making it easier for anyone to participate, regardless of their physical location.

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Investor shift from unprofitable unicorns to profitable acquisitions

Capital raising, especially for key sectors servicing the healthcare industry, remote work and on-demand services, is anticipated to continue to remain strong and we will likely see significant valuation jumps across these areas.

However, capital intensive startups that originally had models that could only become profitable after four to five years of massive additional capital injections will not be as strong in the short term, and many will likely fail if they don’t make massive cuts immediately. Many investors will also shift in the downturn to be more short-term return focused, versus long-term risk.

While a percentage of private investors will focus on existing portfolios and only invest in companies with traction, foregoing early stage deals, the winners in the markets according to Warren Buffet are typically those who can afford to wait out market flux and the same is true for those who will continue to take the high-risk investments in early stage startups.

Future investing: Considerations for startups

It’s also important to keep in mind that investing in startups will still be data-driven and reflect the yearly climate, which means it may look a little different than it has in the past. Amid the pandemic, the needs and demands of the market have changed dramatically. Future needs can be extrapolated – at least partially – based upon the data surrounding these trends.

One huge change is that remote work and education have become core operational models almost overnight as a response to health concerns. Most experts now believe that solutions and innovations in these areas will outpace many other sectors for the foreseeable future. Furthermore, many companies have reported preliminary results finding that remote work solutions are not only working for them, but they are considering longer-term flexibility in order to reap cost savings from changing property needs.

Ultimately, this means that mobile solutions with the capacity to enable work and education needs from anywhere will be here to stay – and innovative startups in the educational/tech space have tremendous growth potential.

Innovative healthcare startups are another key area in which investors may have a higher likelihood of experiencing strong and rapid growth. The market is currently demanding many COVID-19 related products, such as better testing capabilities and protective equipment and devices. In addition to this, patients suffering from many different conditions are seeking better ways to access healthcare in a way that minimizes exposure and risk.

The healthcare industry was evolving to embrace telehealth solutions prior to COVID-19, but the pandemic likely means these solutions in the MedTech and healthcare arena must be made available faster, and they will likely be here to stay.

And while COVID-19 presents an opportunity for many sectors, it is hitting others much harder, such as food, hospitality and transportation. Many companies across these industries are currently facing the prospect of suffering massive losses. Current challenges that make it more difficult to gain market traction under the old operational model are forcing their hand. That’s why these organizations need to digital adapt and to do it quickly.

Fortunately, there is also space for innovation and service-delivery transformation in many of these industries. Those companies and startups that are determined to find safer and more convenient ways to still meet the desires of their customer base can find massive success.

Efficiency will also gain more attention as companies struggle with tighter profit margins. Some companies that may have previously considered automation will now want to take a harder look at it before hiring back their staff. We likely will be looking at a much more automated workforce by 2021 as businesses have been forced to transform their business model.

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Attracting the right investors in a challenging financial climate  

Unfortunately, there are no sure-fire methods that will guarantee that any startup can secure funding in today’s market.

However, you can consider some of these elements that will remain attractive to investors under current market conditions, including:

  • Companies with the ability to disrupt or transform their industry, particularly those that excel at what they are doing, and have a proven track record of success working as a team.
  • Innovation services that enable remote work and education, such as contactless and automation technologies.
  • Solutions that benefit health, safety and wellness for consumers as consumers are becoming more health conscious.
  • All types of goods, whether B2B or B2C, as long as they are unique, have a solid profit model, and have a proven track record of sales.
  • Those offering solutions in remote business and education to help put people back to work and retrain them into new careers and skills.

In addition to the growing importance of these specific concerns, entrepreneurs must continue to stay true to the basics of having a strong operational proposition, a solid business plan and sound market strategies. Another key component is understanding the human capital of the startup, including the knowledge, skills and competencies of the startup team. The human capital component is often a huge predictor of future success that investors will continue to seek.

Companies that can meet these criteria will continue to succeed at finding funding, even during the most challenging economic circumstances.

In addition, entrepreneurs and investors who drive change and who can make a positive impact in the current world can also find great financial success together. These elements are the key to surviving capital raising during marketplace disruption.

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