Seed Investing: Is It Still a Possibility? – As economic fallout from the pandemic stifles small businesses, venture capital firms that were in the fundraising stage have slowed their commitment-making. It remains uncertain how long the disease and its economic impact will linger.
For opportunistic investors, falling valuations represent an opportunity. It’s a chance to buy into promising start-ups at a steep discount, claiming desired ownership stakes at prices not seen in many years.
Unless your business is seeing growth due to changes in the market caused by the pandemic, now is not the optimal time to look for funding. If you manage to secure a meeting with venture capitalists (VCs), try to identify which stage of investing they are in to help guide your conversation.
Stage 1: Triage. VCs are deciding which portfolio companies to continue to support to best ensure their survival and, eventually, growth.
Stage 2: Market exploration. VCs begin meeting again with entrepreneurs, though their goal won’t be to identify possible investments but, rather, to gather intelligence about what’s happening in the market.
Stage 3: Risk-averse investing. When VCs get back to making new investments, they do so cautiously, looking for reasons to say no. The pace of investment is slow, and they are most interested in companies with a capital-efficient model that shows some growth, or in businesses like remote learning that benefit from market changes.
Stage 4: Opportunity. Once the economy shows signs of improvement, VCs act on opportunities. Their mindsets change from looking for reasons to say no to looking for reasons to say yes.
It’s unlikely that firms will make significant investments outside of their existing portfolio for a while, so you’d be better off focusing on establishing relationships and nurturing potential investments made down the road. If your company needs capital, your priority should be your current investors. They’re in the midst of triage, so you’ll want to demonstrate that your company is worthy of continued support.
When venture capital firms invest in start-ups, they’ll make sure to back companies that have both the discipline to stay lean and the agility to grow quickly when things improve.
Smart start-ups already are pivoting into money-saving rather than money-making spaces — and that kind of flexibility and market savvy can serve as a proxy for other indicators that a company has what it takes to survive and thrive.
Once VCs decide to invest, funders, such as institutions, will focus on their well-performing portfolios by providing monetary support to ensure that these enterprises survive. They may not deploy capital to new companies, either. The burden lies on angel investors to support companies’ short-term survival and ensure a healthy pipeline for institutional investment funds after the crisis has passed.
At the start of the pandemic, venture investors pivoted sharply from open-handed deal-making to austerity. It also became clear that some companies that seemed obviously suited for the future of business were actually shockingly shortsighted, and some relatively unassuming start-ups were perfectly positioned to take off. Even trends that shrewd economists had already noted, such as the rise of the remote office and the cloud-computing and e-commerce framework that underpin it, accelerated to a pace that no one could have foreseen.
Meanwhile, start-ups are tightening their belts. An industry that was once recklessly focused on growth and expansion is taking a hard look at how to survive not only this crisis but also the next one.
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