by Galiano Tiramani, co-founder of Boxabl
Like any operational company engaging in the chaos of the COVID-19 market, early-stage tech startups have a tough hand through 2020. Founding a startup and expanding at a time like this bring intense opportunities and intense challenges. Consumer needs are urgent and constantly changing. This creates a tremendous upward trend for companies that are able to identify and initiate new answers to new and important questions. But for startups, both survival and expansion require real capital, and the task of fundraising amid such fluctuating volatility is enough to keep any founder up at night – banks become more risk averse, friends and family may be less motivated to provide initial support make investments, and the founders themselves are not immune to the instinct of financial security.
Despite the desolation at the surface level, it is worth understanding the reality of venture capital in COVID-19 conditions. The numbers available for the last three quarters of 2020 tell a different and more hopeful story. A December report by Tooploox analyzed data from Crunchbase to reveal trends in venture capital financing during the economic recession. First, the numbers clearly showed that the number of investments made by VC funds decreased significantly in April and May compared to the same period in 2019.
However, two other results were relevant and seemingly counter-intuitive. Crunchbase’s data showed that the overall value of investments was unaffected by the recession. April and May 2020 looked very similar to 2019. In addition, the average value of individual investments soared this year, almost twice as high as the 2019 average over the two months tracked. Put simply, this data shows that while VC funds invest less, they go all-in when they find the right solution.
It’s overwhelmingly good news, especially for the founders who believe they have a real solution or product for the nuances of our time. Getting investor attention may remain a challenge, but it seems clear that the capital is in the market and the benefits of the right fit are oversized. It will be a long and winding road, but border founders will no doubt consider the above dates as a green light.
To make it happen: Pandemic-proof fundraising.
Having a clear direction backed up with meaningful metrics has always been a must when it comes to gaining the support of an investor. The ongoing pandemic makes this all the more important – early-stage founders need to understand where they fit in the changing landscape of their industry, and their metrics need to speak the language of the COVID era.
Although funds are still available to investors when a deal aligns with their interests, the general risk appetite has decreased noticeably. It has become more difficult to sell an investor for a business plan. Among the most important metrics, market adaptation has always been the key to conveying a founder’s vision for the startup. Now it’s also important that the founder’s research takes into account the changing consumer landscape.
Startups need to offer at least a basic understanding of how their industry is changing and how they fit into and complement that change. Forward-thinking awareness and a keen eye for change in the industry could be of greater value to a founder than previous achievements or a proven track record. With a firm understanding of the problem to be solved and convincing language regarding the competence of the start-up solution, founders have the best chance of building meaningful relationships with current investors.
There are often a number of cost breakdowns included in an initial investor exposure. Acquisition costs, storage costs, gross and net profit margins, and monthly incineration. Here, too, the COVID-19 crisis is changing this area slightly. After a mass supply chain failure, many existing business owners are changing their manufacturing and sourcing strategies. Startups that understand these shifts and can demonstrate a strong future manufacturing strategy may be more successful than those that can keep the cost of goods sold or services provided down.
In addition, many investors now have more tolerance for a few flat quarters. Startups that fail to generate quick revenues and large margins during COVID-19 are not necessarily out of the running. Instead, many investors have switched to longer-term strategies. They look forward to what projects could be started for future success after the pandemic, and they don’t mind showing some patience along the way.
While it may be a tougher time for startups looking for initial or expansion capital, the reward certainly justifies trying. Investors are more cautious, making fewer transactions, but adding value to their contributions when the right opportunity arises. With a clear vision of the time we are in and where we are going, and with a compelling argument that your startups are in this new normal, the task of raising seed capital is far from impossible. In fact, there could never be a better time.
Galiano Tiramani is a technology entrepreneur and co-founder of Boxabl, a borderline manufacturing technology company that developed the world’s only home building system compatible with scalable automotive manufacturing to make better homes, faster, at a fraction of the cost. Galiano was instrumental in raising several rounds of capital for Boxabl.