What Does Early-Stage Funding Look Like Right Now?

As businesses around the world continue to deal with the economic fallout of COVID-19, there’s a lot of uncertainty around how the crisis will change the funding landscape — especially when it comes to early-stage investment.

While difficult to track in ‘real-time’ if there’s been any drop in funding yet (mainly due to reporting delays), according to Crunchbase, going by past cycles it expects a sharp startup funding slowdown over the coming months.

Venture capital firm Sequoia Capital, meanwhile, warned in an email sent to its network of founders and CEOs, that coronavirus could facilitate a period of prolonged turbulence before the global economy recovers its footing. 

The note, titled “Coronavirus: The Black Swan of 2020”, recommended that companies should be trimming outgoings, revising sales forecasts and re-evaluating costs of products. The outcome, it suggested, could be a fundamental change in the world’s business landscape.

To help gauge the climate in the absence of any concrete data, 500 Startups — a global venture capital firm that’s made more than 2,300 investments in companies across the globe including Credit Karma, Twilio, Canva and Grab — conducted its own survey.

By enlisting the help of its startup investor community — the majority of which identified as venture capital or angel investors — it found the consensus to be that the pandemic will hurt early-stage investment activity, with most respondents believing the after-effects could last between one and two years.

For many, it was judged too early to say how their investment strategies would change, however, an increased interest in specific industries affected by COVID-19, such as healthcare, remote work solutions, and mental health offers a glimpse into which categories may emerge as winners in the long term, with health and wellness fairing well.

Markets cautious not closed
Despite the seemingly gloomy outlook, the market isn’t closed according to Oliver Lawson​, associate at Alantra — an international financial services firm that works with clients across multiple sectors, including wellness and fitness, to help them raise funds.

“We’re still busy and working, we still have live deals that are moving forward, so the world isn’t on hold but everything is being seen through a different lens,” he tells Welltodo. 

However, when it comes to private equity firms, their first port of call will be “to invest quite a lot into their own portfolios to make sure their current investments survive this period,” he says.

For Inverleith, a specialist consumer investor operating in the lower mid-market with current investments including Planet Organic, Good Hemp and Motezumas, that certainly rings true.

“Clearly in a global crisis of this magnitude, immediate attention shifts from long term strategic thinking to focus on the short term, to ensure that businesses are in as strong a position as possible to weather the storm,” explains Michael Atkinson, Operating & Brand Investment Director at Inverleith.

“Focus, therefore, has been on working to make sure that our portfolio companies can continue to serve their customers and meet their needs,” he adds. With Planet Organic, which has an important role to play in the local communities in which their stores operate, attention has been on ensuring stores remain open and stocked. For Good Hemp, meanwhile, work has revolved around increasing the manufacturing rate of its Good Hemp milk, as plant-based milk alternatives see strong demand over this period. 

And when it comes to the long term, in a sign of more positive times to come, Atkinson says there is no change to Inverleith’s investment strategies, as of yet. 

“We may need to re-base some growth models, depending on how businesses emerge from COVID-19, but our strategies for growth are unlikely to significantly change,” he tells Welltodo.

Offering another glimmer of hope, is the huge amount of cash that private equity firms will be sitting on due to the sustained period of uncertainty in the market, including Brexit and an unstable government, notes Lawson. 

Despite current assets being the short term focus, the need to deploy that capital will continue to grow, which means that further down the line if the right opportunities present themselves, for some, the urgency to capitalise on them will be greater than ever.

So, who will win?
“Once we’re out of this, there’ll be a lot of change in the way society actually works,” says Matthew Radley, Corporate Finance Associate at finnCap — an investment bank and financial advisor based in London.

“And this will cause a longer-term shift in terms of the opportunities investors will be seeking,” he adds. 

Business models in the wellness sector that are already seeing interest from investors, due to an increase in adoption during this time, such as food delivery companies, digital fitness and health solutions and corporate health offerings, will be in a fantastic position to attract and deploy funds, with acquisition opportunities presenting themselves in particular, he tells Welltodo.

And they won’t just be winners in the short term. On the contrary, “they’ll form part of a more structural change to the economy and the way consumers act,” Radley argues.

For the high-performers the opportunities still exist, however, Radley says it’s worth noting that the appetite from funders seems to be that valuations post COVID-19 are likely to reflect the tricky times and will come down from where they had been previously — the bar for investment may also be raised.

Should you raise?
For business owners wondering if they should raise during this period, it really should be judged on a case-by-case basis, says Lawson. However, his main piece of advice for business owners is to ask if you really need to raise right now, or not?

“Businesses should be thinking what’s the need? Why do I need to do a deal right now,” he tells Welltodo. “If it’s because there’s an opportunity I would hold off, but if it’s I need money to pay people and get through this, then that’s a different conversation.”

The cost of equity or cash coming in at the moment is very high, he explains. And there will be private equity firms and a lot of investors seeing this as an opportunity to pick up pretty good value businesses — those they see as struggling, perhaps a little weak in terms of their ability to negotiate a good valuation or a good price — so it’s unlikely businesses will get the valuation they need, he reveals.

With that in mind, for those in a position to put their funding plans on ice, now’s the time to focus on making the business more attractive to investors in the long term.

According to finnCap, demonstrating the ability to steer your business through this period will be a big tick for potential funders. But what does that look like?

How to steer your business through this unprecedented period
Here finnCap lays out the steps businesses should be taking to ensure they will remain a going concern and can trade through the crisis.

• Boost your balance sheet: This means taking advantage of all government support, including the Retail, Hospitality & Leisure Business Grants fund, Coronavirus Business Interruption Loan Scheme and furloughing staff. 
• Revisit forecasts: Companies need to work through their forecasts as quickly as possible and take decisions quickly.
• Move quickly: If there is a need for further funding then get to the front of the queue with both banks and investors. 
• Flex your model: Companies that can work through this period by flexing their business model to generate some form of cash flow and sales (i.e. gyms renting equipment and hosting virtual classes) will come out of this well. It highlights a robust business model with an imaginative out of the box thinking management team.