How to fundraise in the time of COVID-19

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With founders and investors alike fleeing conference rooms, coffee shops, and coworking spaces due to the COVID-19 pandemic, fundraising is now largely taking place via video conferencing—a virtual experience that’s new for most people on both sides of the equation. The long-term impact of this shift to online fundraising remains to be seen, but one thing is certain: founders are scrambling to adapt to the “new normal.”

Here’s what to anticipate when it comes to online fundraising so you can adapt quickly and keep your business growing.

Don’t be afraid of a down round

The current economic climate increases the chance of your business having to raise a down round—a term that describes raising money at a valuation that’s less than your previous round. Although a down round typically casts doubt on the stability of your business, the broader economic slowdown ameliorates how much a down round should impact investor trust. 

By taking care of employees and getting creative with financing, you may be able to successfully navigate a down round and minimize the long-term impact on your business. 

Prepare for risk-averse investors…

Investors once keen to ink a large volume of deals are now reevaluating their portfolios based on how the pandemic impacts companies. Some businesses, such as healthcare startups, are even more crucial in a post-pandemic world. Some associated with travel or personal care are negatively impacted, and still others are neutral. How investors move forward will depend on the percent of their portfolio companies that belongs in each category. Though this reprioritization will impact all founders, first-time founders are especially likely to face increased scrutiny. Investors looking to minimize risk may prioritize founders who are already seasoned operators.

The best way to win over risk-averse investors is to focus on how you and your business are planning to weather the storm. Highlight how your background makes you an ideal leader during uncertain times. Anticipate investor concerns about changing customer behavior in your field. Show them that you’re ready for the challenges ahead.

…But anticipate a renewed focus on diverse founders

Many expected this era of virtual fundraising to cause biases to flare, furthering the inequality that has plagued venture capital for decades. After all, a female founder pitching her company faces an even bigger risk of maternal bias if her toddler decides to make a cameo in her video chat. But this is a summer of social change—giving rise to hopes that we might see greater equity in VC funding sooner than we thought. 

The protests that have erupted across the U.S. have forced many VCs to look in the mirror and see how they have held up traditional power structures. Only 1% of venture-backed founders are Black, and just 1.8% are Latinx. Women have also long lagged behind men in raising venture capital for their startups, particularly as first-time founders. The overall percentage of VC dollars received by female funders has been stagnant for a decade, at about 2.5%. 

However, a number of venture capital firms have recently stepped up to address their lack of diversity directly, pledging to support more Black founders and women founders from underrepresented communities. Though these measures won’t solve the gaping gender and minority fundraising gaps overnight, they are a positive sign that women and minority founders may find more opportunities to get their ideas in front of investors who want to architect systemic social change.

Stick to the basics

Founders report that virtual VC chats are often painfully short. A three-to-four-minute VC pitch is a challenge.

Your best bet for making sure those few minutes shine? Practice, practice, practice. Breanne Acio, the founder and CEO of Sekr, practiced and delivered her pitch for Techstars Virtual Demo Day from her camper van. Her advice: “It takes weeks of practice and iterating to get it right.” 

You can’t afford to stumble through your introduction when you only have 180 seconds on the clock. Work on your delivery until it is crisp and polished to give your ideas a chance to shine. 

Move quickly—and carefully

In uncertain times, it can be tempting to move fast and close quickly. However, some investors use market volatility as a cover for sneaking non-standard terms into your agreement. Make sure you balance a need for speed with a critical eye. Stay vigilant against unfavorable terms, including:

  • Liquidation preferences: This enables one class of shareholders to be paid back first in an exit, often with a guaranteed rate of return (such as double the original investment). That means investors with liquidation preferences could get twice their money before anyone else—including employees—benefits financially from a successful exit.
  • Full-ratchet anti-dilution provisions: These provisions guarantee that an investor’s shares won’t be diluted in later rounds if a company’s valuation drops.
  • Bridge loans with liquidity terms: A bridge loan helps a startup bridge a gap in funding until it raises another round. It’s not necessarily a bad thing, but some loans have provisions that convert them into double the equity if they are not paid back by a certain date. Sometimes the double equity can be triggered by failing to meet certain performance goals as well.

 

 

Check out our recent webinar on fundraising effectively for more information, and watch this space for more expert advice on how to fundraise virtually.

 

DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. 

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