After lots of conversations this week with both founders and investors (from early to late), I wanted to quickly jot down my thoughts as they relate to what startups can expect in 2020 when raising funds. The first disclaimer here is, obviously, capital financing for new ventures, while certainly important to some people, is not as important as good public health, resources, and information. The second disclaimer here is, again I hope obviously, is that this post is geared entirely toward how a founder may consider responding to the current environment and in no way seeks to offer any health information or advice. Apparently a bunch of folks feel investors have shared dubious information online as this public health issue unfolds, and I am not qualified to opine on such matters.
So, with those disclaimers out of the way, here is a list — in no particular order — of what I think founders should be aware of when it comes to early-stage fundraising, not just in the short-term, but likely through the end of 2020:
Business Models and Go-To-Market: A big component of what gets investors excited about an investment is the potential for efficient distribution. For startups that boast business models which are dependent upon activities such as travel, or events/gatherings, or top-down sales models, or systems that require on-prem setups, or getting into the consumer wallet share, it would be wise to anticipate questions from investors around these topics. They may not say so on Twitter or in the meeting (which makes this topic subtle but important), but behind closed doors when they are evaluating models someone in the room is bound it bring it up. By contrast, API-driven, or self-serve, or upfront multiyear recurring revenue models will be seen as more valuable, where product-led growth could be a premium. Some may want to consider having a slide dedicated to this in pitch.
Early-Stage Investing is a People Business: So much of early-stage investing is dependent upon face-to-face interactions. There are lots of funding sources out there now, and more investors today are comfortable having relationships and communications entirely by video or phone. Again, this is what most people will say on Twitter or to you during the pitch process. However, so much of the very initial, raw, emotional sentiment is forged in a face-to-face meeting. What does that mean for founders who do not want to take live meetings right now? What does that mean for founders who were talking to 6 investors last week, but today, only 2 of them want to meet in person? What does that mean for founders outside the Bay Area who are either hesitant to travel here or now face a contracted audience? I don’t know the answers here but it feels tough.
Categories Matter: While so much of early-stage investing is about the people, as the checks get bigger, larger investors will certainly have opinions about category selection. Going back to business models and GTM, there are now entire new industries thrust into the limelight because of the sudden shift in work and consumer behavior. Look at the rise of Zoom’s stock price over the past few weeks. Video, for instance, may now be both pervasive enough and important enough to verticalize further, where we could see an explosion of “Zoom for ____” happen. I’m sure it already is. Other areas like work collaboration, social media tools, homeschooling networks, and more are suddenly now imagining the prospect of new opportunities. Fair or unfair, behind closed doors there will be categories that are currently out of favor, so it would be best to anticipate these objections and perhaps even address them head-on. These will ultimately get reflected in valuations for the deals that do end up getting done.
Zooming Out: Zooming out a bit (sorry), investors may begin to segregate “fragile” versus “anti-fragile” companies, models, and categories. In the Taleb framework, what is truly anti-fragile today? Should those assets be worth more? Should some value shift from newly-deemed fragile entities to anti-fragile ones? We may be seeing this in the public stock markets, with airlines suffering but Zoom rising. Safe to say it could happen in startup investing, too. In terms of countercyclicality, what could be in-favor today that wasn’t a few weeks ago? Company location and cultures will matter — will remote be seen as a competitive advantage now for recruiting and anti-fragility versus an accepted model from a few months ago?
This double-sided economic shock is going to be here for a bit. Investors will still invest. They will say nice things on Twitter and in the meetings. The ways deals that get done now go down will shift back a bit toward a more normal cadence (it has been out of control for a few years), but it will still be a great environment for good founders, absolutely. As a founder, it will be good business to anticipate what may be side behind closed doors and to fine-tune those pitches accordingly, at least for the duration of 2020.