5 Things to Know About Startup Fundraising Through 2020
Even amid all the uncertainty, there are still funding opportunities for promising startups.
As part of our Disruption video series, I recently spoke with a few of my J.P. Morgan colleagues—Pamela Aldsworth, Managing Director, Head of Venture Capital Coverage; Ricardo McKenzie, Executive Director, North America Private Capital Markets Group; and Ariel Granoff, Executive Director, Regional Investment Bank, Family Coverage Group—on the topic of fundraising in a pandemic. Read below for some of the highlights from our talk, and watch the full conversation for more insights.
Many founders went into 2020 with optimistic growth projections—and ambitious fundraising plans to scale operations. The COVID-19 pandemic rewrote those plans in a matter of weeks, upending what for many had been a strong start to the year.
Startups and funders alike have spent the last few months reassessing their strategies and feeling out the path to a new normal.
“Everyone has this fear of the unknown and where revenues and valuations are going, and neither has really panned out yet,” says Aldsworth. Despite the uncertainty, Aldsworth and others say deals are happening—if you know where to look.
Here are five takeaways for founders looking to fundraise in this environment:
1. The Money Is Out There
While many onlookers compare the current downturn to the 2008 recession, the capital environment is completely different this time around. In fact, there’s likely more liquidity in the market today than there was pre-pandemic, says McKenzie. From family offices to angel investors, private equity to traditional credit and loans, there’s a wealth of funding options out there.
According to McKenzie, it isn’t a question of whether there’s enough capital—but with startups today competing not only with other startups but also with public companies, it’s more about how you differentiate your business and what key levers you have to access that capital.
2. Funding Prospects Vary by Stage
When venture capitalists invest series A or B funds into a promising startup, they’re potentially embarking on a seven-to-ten-year partnership. It’s hard to make that kind of commitment over Zoom.
“People are hesitating to invest in early-stage companies right now when they can’t go and have that interpersonal relationship,” Aldsworth says. “VC is all about relationships. In series A and B, that’s a real problem.”
It’s less of an issue for seed stage companies, she says, given the smaller scale of those funding rounds. And for growth stage companies, deals were likely already in the works. So the real squeeze is on those companies in the middle.
3. Certain Industries Are at the Front of the Line
Remote work and e-learning are nothing new, but their rapid adoption during the pandemic has accelerated demand. That has led to increased interest in startups supporting telehealth, education or distributed workforces.
While fundraising isn’t hopeless in any sector—as even restaurants and cruise lines have attracted attention in recent months—many funders seek startups that can withstand whatever comes next for the virus and economy.
4. It’s Time to Reconsider Your Plans
Be willing to rethink key aspects of your business—from how much cash you need to how you’ll get it. Take a page from VCs, who are looking back to 2008 for lessons and advice they can give their companies today.
“They kind of dusted off the playbook and said, ‘Listen, you need to have at least 18 months of cash. Twenty-four is even better,’” says Aldsworth.
Once you determine how much cash you need, think creatively about potential funders. Maybe you intended to lean on VC, but now could be the time to meet with a diverse range of investor types.
In addition to increasing their cash on hand, startups need to slash their expectations. Aldsworth says to “throw last year’s 2020 projections into the garbage” and craft a new plan showing a reduction of 25 to 50 percent in your top line.
5. Always Bring Your “A” Game
One thing hasn’t changed: the power of relationships. For family offices, nothing beats an intro meeting with a prospective company, says Granoff. These meetings are the first step of many in getting to know a startup—and for the founder to meet the family office and learn what sets it apart from other investors.
“Sometimes it takes them one to three years to get to a deal with a company,” Granoff says. “That process of getting to know you sets them up so much better to avoid competitive processes in the future.”
Given the stakes, an intro meeting is never just a meeting. So when you book time with any type of investor, whether it’s a family office or VC, come prepared.
“Make sure you have a really crisp story that makes sense and that you are showing your value proposition,” Aldsworth says. “You can never, ever be casual going in to meet these guys. When you go, you have to bring your ‘A’ game.”