How the investment market changed during Crisis? What should tech companies and startups expect?
Surely, this is not how most of us pictured the “roaring twenties” of this century, and 2020 has been quite a shock to all of our systems so far – both personal and global.
One of those systems, the economy, has taken a toll already and will continue hearing the echo of this coronavirus crisis for months if not years.
But are the forecasts really that grim?
How will this crisis affect the investment market, and specifically, what should the IT and start-up market expect on the other end of this pandemic?
Qubit Labs helps startups hire developers and decided to host a webinar with two guest experts in the field and tried to outline the changes taking place on the investment market and share some tips on how to approach investors in these times of uncertainty. This article is based on our talk with Yurii Filipchuk, a partner in CYFRD Frontech Investments. CYFRD is a Ukrainian investment company, providing capital and strategic support to the local startup scene, mostly focusing on deep tech. Yurii told us about the challenges and opportunities year 2020 carries for entrepreneurs of tech. Meanwhile, for tips on the essential things your pitch to an investor should contain, you could turn to our conversation with Yulia Sporish in the article “8 Main Things to Include in Your Pitch to an Investor”
We asked Yurii about their own plans and forecasts for 2020 as investors, as well as the general tendencies he can spot on the market that’s faced with the sudden stress. He explained that CYFRD had just emerged “out of the shadows” of the complete stealth mode in 2019 to start attracting projects at the earliest stages and is currently looking in the direction of Deep Tech and startups, with a proprietary technology that is the main value of the company and would be licensed and potentially sold. They’re testing a basic hypothesis that high-technology startups from Ukraine wouldn’t necessarily need to build huge businesses to succeed but could be simply sold as a technological core of a business. It’s not CYFRD’s only focus, but definitely the direction their attention is pointed.
So what’s the investment prognosis for 2020? Are the investors freezing their ventures? Or is there a particular industry the investment has shifted to?
As Yurii pointed out, naturally, special-opportunity startups with a lot of traction and oriented at bettering the current force majeure situation will most probably have a higher chance for investment. If your startup addresses curing people, managing the spread of the virus, testing or development of the vaccine, then chances are, it will be sought after even if it’s at the concept stage and has good odds of attracting investment money. However this all would still be likely to happen on the local level. It takes a lot more time and effort to win investors’ attention for your startup abroad. It isn’t hopeless however, European and American grants exist and are shifting their focus to fight the pandemic, just like most institutions. For instance, the EU has allocated 164 million euro to finance startups that would tackle coronavirus-related problems. This being said, no one cancelled having to have a substantial business plan, a solid pitch and a properly drawn-up project for your idea to even be considered.
Investment cycles and potential course correction
Meanwhile, if we take a look at the grand scheme of things, 2018 was a record-busting year for venture capitalists. They attracted around 60 million dollars in investments, so the investment funds are full and this money needs to be put to use. On average, a life cycle of an investment fund is between 7 and 10 years, so young funds can allow themselves to take a moment and “sit on the money” for a year or two and observe the situation. Whereas funds at later stages of their life will need to seriously consider all of their investments and their potential ability to enter and exit a certain investment project before the fund’s termination. When the investment money is in abundance, it’s easier to juggle several projects and draw estimates without the risk of failing, but in the lights of recent events, everybody should understand that this will be much harder to do, hence there will be much stricter consideration. There’s also the possibility that investment funds will try to play it safe and invest in projects and teams they have already worked with and have their certain hopes for. This will happen at the expense of outside investments. Some more aggressive funds will just finish financing these projects, and not even necessarily at the same rates they did in previous rounds, employing a pay-to-play provision, where investors are basically agreeing to participate in future funding rounds on a pro rata basis. So, if any other investor is not ready to finance this project, that investor’s stock is converted into common stock or some kind of shadow preferred stock which eventually leads to that investor losing essential interest in the given business.
Another relevant to the situation question we wanted to explore was the communication and pitching process. Especially now that direct physical communication has halted, how do startups meet, communicate with and pitch to investors?
Pitching in the times of global quarantine
It seems that the online communication dynamic has significantly improved. Today you’ll hear “yes” or “no” much faster, it’s as if doing it online has made people more comfortable with it. The email communication has become much more efficient, too. Even European investors who have earned their reputation as being on a more conservative side when it comes to communication and “courting” have eased the process. To make contact and set up communication with a European investment fund one used to have to plan a trip and visit the investor’s office, so the communication would begin on their territory. Today, things have eased up, writing an introductory email and saying you have a relevant project that seems suitable for the investor’s portfolio is usually sufficient to establish a two-sided communication.
Relevance on different levels of investment. What amounts are investors open to discuss today?
To be fair, the numbers of deals at seed, pre-seed and even angel investment stages have been going down, but due to the volume of these investments, the levels have remained fairly stable. Seed investments grow in volume, but shrink in numbers. It’s hard to invent something new in the fintech field, hence finding money for a fintech project with little or no traction will be very hard. In fields slightly more relaxed, such as B2B which grew after the 2008 crisis and continues to thrive, things look brighter. Yurii pointed out however, that if the subject market is Ukraine, then it’s going to be just as hard as ever for Ukrainian startups at early stages to secure funding. He also shared his observations from recent interactions with investors and said that while a small percentage of funds have openly announced that they would be pausing their activity for the next couple months, to analyze the situation, keep in touch with their current ventures and calculate to utter precision how long their investments so far would last them. Only then would they make any further decisions. There are, however, other investors that choose not to stop any activity and take advantage of the situation by pushing discount rates and essentially making fast money.
What to do while the world is on pause
One of the most important things for startups right now, in Yurii’s opinion, is being on the radar. It’s vital to let the investors know about your idea – call them, email them, tell them about you and your company, stay in touch and update them with follow-ups. Even better if these follow-ups are accompanied by cost-cutting strategies. After the whole situation is over and the game is un-frozen, the investors will remember who didn’t panic, and did their homework.
How do investors find startups to finance?
More often than not, startups come to the investors. What the investors do seek and often fail to find are science-based startups, ideas coming directly from the scientists. It is proven to be a challenge to push scientists to share their developments, think in terms of business and of what can become a potential startup. Meanwhile, when it comes to business model startups, the investors prefer to have an introduction and recommendation from a familiar third party, also circling the startup scene, of course. Networking is essential, but the investor should also gain faith in the idea and see that the people behind this idea have thought it through, are ready to improve, adapt and aren’t discouraged by challenges. An experienced investor will, in fact, try and throw challenges at entrepreneurs and not just give money, sit back and wait for their returns. You should always expect an investor to have a list of several crash points/questions for your startup before they decide whether to even continue communication with you.
First point is your professional background and your connection to the field in which you want to launch your startup. They don’t necessarily have to match, but you sure will need to prove you’ve done your research, explored and done estimations and have experts to back you up.
2. Pitch Deck
The second crash point is your pitch deck where you outline the problem your startup would be solving, how, how much it’s costing the world and how much you could make on solving it. The pitch deck should also include your experience relevant to the issue and proving you’re competent to attempt solving it. Last but not least, you provide calculations and forecasts on how much the startup will yield, how it will grow and how much investment money you need to take over financing this project from profit.
3. Prior testing & research
The next crash point is in how much time and effort the pitcher has spent on testing and research. Some mistakes are easily avoidable and testing some of your business plan hypotheses before pitching, even if it costs you some time, effort and maybe even some money, it will make a good impression on the investor. Also, the more hypotheses in your business plan, the better – and if a lot of them are creative hacks, even better.
4. Your first monthly revenue
Y Combinator claims that a startup should be able to get to their first 10K monthly revenue without spending a dollar on marketing, but through networking and hard work.
What comes next
Now is the time to think of what’s coming next. Yes, things have undoubtedly slowed down and apart from a global health crisis, we’ll be experiencing a financial crisis, but it will not affect the way we pitch projects to investors. On the contrary, after the pandemic panic settles down, people will have new needs and those needs will create new opportunities for business. So it’s important to think of what the people will need after Corona. Getting financing for a startup does not happen overnight, sometimes it takes years to shoot out. Here’s some advice Yurii Filipchuk of CYFRD investments gave us:
Apply for funding. Keep doing what you’re doing and as long as you have faith in your project, do some more. A lot of times it all depends on this faith and on your personal reserves of patience and toughness. If your startup is in an early stage, take a beat, wait out the quarantine, see what business models survive through it. If you’re at the negotiation stage, carry on and push forward, and if you’re closing in on a deal, good luck and may that cash hit your account!
Qubit Labs is a Ukrainian based software development center where you can hire your own offshore development team for your company. It’s like opening your own R&D center/development office, but without hassle.
You can hire one software developer or a full-cycle development team to build your product from scratch and to satisfy your unique needs. You will be able to interview every developer before joining your team, so you can be sure in the product development quality.
Contact us to get CVs of available candidates who can join your project asap.