In conversation with R3: fundraising during Covid-19
How are investors viewing enterprise start-ups right now?

Generalising about all enterprise start-ups makes little sense. The individual circumstances of the business are more important than ever.

Take end markets as an example. Some are likely to go through even longer sales cycles, resulting in slower growth and/or higher capital requirements. In other verticals such as healthcare and flexible working, there has been an acceleration in the adoption of new products and technologies. Certain business models (e.g. SaaS) and go-to-market approaches (e.g. bottom-up, product-led) can also be deemed to provide relative advantage in this period of disruption.

However, it’s not just the period of disruption that matters. VCs have a long-term horizon, so it is more important to understand what the reality might be like in 5 years’ time as opposed to right now. Investors are working hard to discern the changes in consumer and business behaviour that might follow. As usual, above all, we are looking for agile, visionary teams that can navigate the uncertain environment and take advantage of the opportunities that emerge.

How do startups investors assess the potential longer-term risk of Covid-19? How does that affect their investments?

The long-term impact of Covid-19 is definitely the topic du jour and it has been the subject of many discussions at MMC. While it is impossible to predict the future, there are certain long-term trends that might get accelerated as a result of the Covid-19 disruption. My colleague, Simon Menashy, has written a great piece summarising some of these.

Beyond the disruption over the next 6–12months, one of the major longer-term risk I am thinking about is exacerbation in inequality. The acceleration in technological change as well as the severe economic consequences of the lockdowns may leave many behind and make an already dire situation even worse. The gap between the have and have nots in the society can widen, existing biases can be reinforced. This will have severe consequences. Both entrepreneurs and investors alike have a responsibility to counteract the secular forces and use innovation to build a fairer system. Innovation should not be a zero-sum game.

How can enterprise founders extend their runway right now?

Simply put, there are two ways to extend your runway quickly: 1) raise additional capital and 2) reduce cash burn.

Despite the disruption caused by the virus, I am seeing robust activity in the market (both equity and venture debt). Investors continue to fund new companies as well as actively support their own portfolios. That said, there are some differences across the market. Seed-stage deals seem relatively unaffected but Series A and later-stage companies are finding that investors are adopting a more cautious stance in the current environment. This translates into slower processes, lower valuations and more aggressive deal terms. The best entrepreneurs and businesses, however, are still able to run very competitive processes and raise at premium valuations. It is encouraging to see that the market remains liquid even after the unprecedented disruption to economic activity.

Equity and debt aside, we’ve seen a plethora of government support measures being introduced since mid-March. While some of these are not specifically targeted at the early-stage, venture-backed businesses, they can present a valuable source of non-dilutive liquidity (for example, Innovate UK grants, furlough scheme, Future Fund and others in the UK). Entrepreneurs should stay on top of these and proactively utilise them to extend the cash runway.

With regards to reducing burn, the best companies reacted quickly (in March) to reduce costs in areas that are unlikely to see the high growth rates in pre-Covid budgets, while maintaining enough flexibility to pursue new opportunities. Some of the measures we’ve seen are 1) hiring freeze, 2) salary cuts (some have compensated certain employees by giving them options), 3) lay-offs, 4) reduction in the working week, and 5) renegotiating terms with key suppliers (e.g. rent, cloud providers). Despite planning for cost reductions over the next few months, entrepreneurs should operate with an eye towards a potential recovery and remain alert to new growth opportunities.

It is worth remembering that all great, enduring companies grow up through one or more economic downturns.

What advice would you give to enterprise founders seeking new capital?

The advice would vary depending on the stage of the company, but, in general, be mindful of the market environment — things take longer than usual and investors are more cautious compared to three months ago. It is, therefore, important to demonstrate:

the fundraise gives you enough runway (at least 18 months, preferably 24);

the go-to-market has been appropriately adjusted to the new realities (e.g. no event marketing);

the cost-base has been appropriately sized for what might be an extended period of uncertainty and slowness;

the team is agile enough to take advantage of new opportunities, which often arise in periods of rapid change.

Given the tough environment, prioritise existing and ‘warm’ relationships; new relationship building may be more challenging as face-to-face contact and travel is restricted. If fundraising is planned for 2–3 months time, assess the timing of the raise in potentially ‘soft’ new business months; consider pulling forwards or pushing back the raise. Maintain flexibility with regards to round size and structure — you may want to consider a top-up of the last round or raising a convertible loan note.

How can start-ups offset the delay in revenue generation vs getting funding for development?

In an environment where landing new enterprise clients could be challenging, businesses should put a greater focus on retention. Expanding current relationships becomes vital too — this could be achieved via cross-sell of adjacent products, upsell to additional features or expanding within the clients. Teams might need to rethink and/or accelerate their existing product roadmaps to better align to the new strategy.

What’s most important when enterprise startups pitch to potential investors now?

The aspects investors consider when evaluating opportunities have not changed much. As always, one looks for a visionary team with the ability to execute, an idea that can grow into a substantial business, and a unique insight/edge that provides differentiation. In some ways, the turbulent environment provides ample opportunities for innovation and growth, so answering the question ‘why now’ is crucially important.

On a more, tactical level, I am very much interested to better understand how the Covid-19 crisis has changed the way the team sees the world and runs the business. This so called ‘Covid signal’ provides great insight into the resilience, agility, culture, and, therefore, the long-term potential of the company.

What future trends in the enterprise DLT space are you expecting?

Enterprise interest and investment in DLT has been accelerating steadily throughout 2018 and 2019. We’ve seen exploration transition into experimentation and, increasingly, into deployment. 2020 might be the year when DLT reaches ‘escape velocity’ in terms of adoption, i.e. the point of no return. Covid-19 could play an interesting role in this context.

A key trend over the past decade has been the digital transformation of most industries. The Covid-19 crisis underscores the need for true digitisation (as opposed to merely replicating offline processes on a digital medium) across all industries by showcasing the vulnerability of the current system. DLT is compelling as an enabling architecture for digital transformation, especially when combined with other technologies such as IoT and machine learning. Hence, the current shock could further increase enterprise interest in DLT/digital assets and accelerate adoption.

As discussed in detail in our recent analysis of the UK DLT ecosystem, an encouraging trend in enterprise DLT over 2019 has been the broader adoption of the technology, outside of Financial Services. I am looking for that to continue with verticals such as Regulation & Compliance and Supply Chain & Logistics being prime candidates for growth.

At MMC, we are excited by the opportunities DLTs offers and have deepened our expertise in the space over the past year. As deployments increase, we believe a more vibrant ecosystem for enterprise DLT startups will emerge to improve scalability, user experience and interoperability (both across DLT but also with legacy systems) of the v1 architectures. This should provide ample opportunity for entrepreneurs. We are looking to back the next wave of category leaders that will emerge.
['Asen Kostadinov']
['Covid 19', 'Fundraising', 'VC', 'Startup', 'Blockchain']