Startup Fundraising and Cashflow in Times of Crisis

What stands out when fundraising in a time of crisis is that the behaviour and mindset of the startup or scaleup founder is more important than ever and especially critical to sourcing investment.

So, from a conversation with scaleup founder Anthony Rose and business angel syndicate co-founder Matthew Stafford, we’ve put together some coronavirus fundraising suggestions for today and tomorrow:

How has coronavirus changed fundraising?

The funding landscape has changed and will continue to change:

For instance SeedLegals, whose clients closed 100 investments in March in the run-up to the UK tax year-end and, are seeing more rounds for smaller investments and with fewer investors. Since the start of the coronavirus, 30% of angel investors have pulled out, but there are just as many rounds albeit for smaller amounts.

On the other hand, business angel syndicate DotMatrixGroup reports that new funding is paused as business angel engagement has dropped off a cliff as business angels assess their own situations. For instance, business angels based in hard-hit sectors such as travel and hospitality, will have friends and family whose businesses are at risk or worse.

In these moments of peak crisis, business angels are simply not going to look at high-risk startups. But the worse will pass…

If you are still raising / in the middle of a round?

If you are raising now, raise fast and get what you can get. Stop waiting for the bus to fill up before departing — get going now, don’t wait!

If you have got half the funding you need, get the money in the door, close the deal. Take what you can, but close the round.

How to cashflow your startup/ scaleup in a crisis?

The first question to ask is this — how long you can last? Then look at how you can use furlough to increase your runway. (Furloughed staff in the UK are eligible to up to 80% of their salary up to £2,500 per month paid by the UK government — similar support is appearing across the startup world).

Essentially, if you halve your cash burn rate you double the time before you need to make a profit. Slash your burn rate by 90% and you can last 10 times longer.

Partly, this decision will depend on how hard it is to source investment in your sector. For instance, Med-Tech companies are seeing investment flood towards them.

Probably, you need to think at least 18 months ahead — do you have enough cash for the next year and a half? And if not, then how do you furlough your teams or create income to shore up the company balance sheet so that there is a business for people to come back to when the crisis passes?

What should founders do in a crisis?

The key is to move quickly when things change fast.

Founders who are looking for answers when aren’t any, will come unstuck. The most important ability in a crisis is the ability to make decisions — failure to make decisions is death.

Given that we don’t know how the coronavirus crisis will affect our future markets and customers, one smart way to respond is to place lots of small bets on the future. It’s how to be lucky — increase your failure rate, but keep the impact of each failure small and get the intelligence back fast.

Want to raise funds in a crisis? Build the relationship

In early-stage investing, it’s nearly all about relationships and emotion-based decision making. That’s why founders are well-advised to be patient and build relationships, even though we live in a wildly impatient society.

Many founders are looking for a magic wand in fundraising and even though you hear rags-to-riches tales, there is always a backstory of perseverance and patience.

A smart way for founders to think about fundraising is to compare it to dating. You don’t ask to get married on the first date — so learn to take your time, to get to know each other and let the relationship take its natural course. This remains true in a time of crisis.

In fact, filtering out those founders who are able to take their time and show good patience in today’s climate is an excellent signal for business angel investments in the future.

Remember, in times like the present, business angels experience an increase in random LinkedIn hits begging for investment. So, if you can time your connections better and seek to build a relationship and not close the deal, then you are likely to do far better in the long run.

How to raise money post coronavirus?

To help with raising money down the line, it is useful to think of how these two typical types of business angel look at investment opportunities:

The Entrepreneur — wants to connect with the startup founder to see if they have that fire and perhaps remind them of themselves in their early days.

The Senior executive or professional — would never leave a well-paid job to start a startup but nevertheless, wants to learn and contribute. This group of angels tend to have a more analytical approach to investing but learning something new is also critical to them and they will learn more from people they like and respect.

What marks out great startup founders? Tough conversations

Preserving cash for startup is the most important thing. However, that is also true of a founder / founder team’s personal life. Now that you are working from home, cancel as many of your costs and direct debits as you can.

Great founders are the ones who are able to make tough decisions to let things go.

Those entrepreneurs who aren’t acting fast, either in the office or at home, tend to be unable to have difficult conversations and this is always going to hold back both them and their teams. And it is a red flag for investors.

How to prepare for the post coronavirus world?

The teams we needed in February 2020 will be different from the teams we need in February 2021. All businesses and organisations are moving into a new market environment, so we will need to rethink the skills, talents and teams that we need. Again, this action is at the tough end of running a young high growth company but absolutely essential nevertheless.

Future funding will depend on your ability to make tough decisions here.

The future for startups and fundraising

The current crisis will end.

We are living in a compressed time — eg. Universities talked about putting courses on line for 20 years — but now they have done it in a week. What couldn’t be done in 20 years was achieved in 7 days — when necessity required it.

That creates new opportunities that didn’t exist 4 weeks ago. And, demonstrating that you are able to create a successful startup in today’s climate will set you up well for investment.

Back to the wild west?

In 2010 / 11 the startup scene in the UK was more like the wild west. Then, people started companies because they really wanted to. However, in the last couple of years, everyone wanted to be an entrepreneur — it became cool.

Perhaps the current crisis is a reset.

Perhaps we are back to the wild west days again and maybe people who shouldn’t have started companies won’t. Equally, the founders and companies that start this year and next year will be the ones who are doing what they believe in and not following a fashion or a trend, and that will be a good thing.

Thanks

This article was written up from our conversation about fundraising and cashflow for startups and scaleups with Anthony Rose of Seedlegals — automated legals for startups — and Matthew Stafford, co-founder of business angel syndicate DotMatrixGroup and 9others dinners for founders.