The COVID-19 Investment Landscape: What entrepreneurs can expect
3rd April 2020
Photo credit: Kane Fulton Photography
March 2020 may well be known as the month that changed everything, and the investment world hasn’t been immune. Entrepreneurs of early stage start-ups have fundraising questions, and NorthInvest have connected with our investor community to give you answers.
Are investors continuing to invest?
The short answer? Yes.
The team at NorthInvest have reached out to our investor network of both VCs and angels and the response has been overall positive. However, some private investors and VCs will be pressing pause on new investments for the next month to focus time, effort and cash into existing portfolio businesses.
Rest assured, VCs have funds secured for the next tax year and it’s in their interest to deploy these. Angel investors similarly will be looking to invest in the new tax year to leverage SEIS/EIS reliefs to offset existing investments. However, personal circumstances and capacity to invest varies across individuals. Don’t disregard these temporarily inactive Angels, though: given their business prowess and expansive industry connections, they are well-worth building a relationship with, ready for when they begin to invest again.
What are investors looking for?
Investors are looking for start-ups that can adapt to the changing situation. If you can survive (thrive, even) in this economic downturn, then your business presents a high potential investment opportunity moving forward. Start-ups have the unique ability to pivot business models in response to crisis, unlike their less agile corporate counterparts. Embrace this.
It has long been the opinion of the investor community in the North that early stage tech start-ups here have been significantly overvalued. You need to prepare for your valuation to take a hit in the short term due to increased risk and lack of liquidity in the market.
Word on the street is, only time will tell whether valuations will recover to pre-COVID-19 levels, although current instinct dictates the market was due a re-calibration anyway, given that valuations had been disproportionately high for a sustained period of time.
I’ve been turned down by VCs/Angels before the outbreak, should I continue to fundraise?
Fundraising can be a time-consuming distraction from day-to-day operations. It can take between 6-8 months to close a round with multiple investors. Only you will know if your business has enough cash in the bank to allow key members of your team to pursue a fundraise.
In light of COVID-19, investors will not only be revisiting their key sectors, but may also be looking at investment opportunities they haven’t necessarily expressed an interest in before. So, if you’ve discounted an investor before because they don’t purport to invest in your sector, it might be worth dropping them a Zoom invite.
Side note: Regardless of the current situation, we always encourage entrepreneurs to carefully consider whether equity investment is the appropriate option for their business. If you can build healthy revenue streams organically and prove you have a sustainable business model without giving up equity, then do. The more developed and sustainable your business, the less risk is taken on by an investor, and therefore the more appealing you will be as an investment opportunity when you are ready to scale.
Do we address COVID-19 in our pitch?
Yes, please, yes.
Investors want to see that business owners have taken a critical look at how their target markets, operating model, route to market strategy and cash flow projections have been and will be affected by COVID-19 moving forward.
Consider how you will manage increased risk – everything from supplier shortfalls to losing key contracts, managing cash flow to safeguarding key team members. This UK economic outlook report by partners KPMG might be a good place to start your assessment.
On the other side of the same coin, if you are a start-up with a product that might thrive in the current climate (looking at you, home workout solutions!) then you need to convey this opportunity – and how you’ll adapt if and when circumstances return to normal and the boom passes.
If you ignore the impact of COVID-19 in your pitch, you will either appear dangerously in denial, or undermine your credibility as an entrepreneur by failing to spot an opportunity.
Before you pitch, make sure you can come up with defensible answers to these questions:
- How robust is your cash flow, have you revised it in light of the current situation?
- What new challenges do you face, e.g. supply chain, and how are you responding?
- Are there opportunities to pivot your business in response?
To help with your business planning, check out KPMG’s blog including economic insights into the impacts of COVID-19.
Watch this space or subscribe to our newsletter for updated news on how our expert partners and start-up community can help support your business.