Articles • 02 July 2020
Fundnel's Director of Investments discusses the realities and evolution of fundraising during Covid-19 with investors and founders. Hosted by Genesis Alternative Ventures.
In this series of webinars hosted by Genesis Alternative Ventures, Partner and Co-founder Martin Tang discusses the realities of fundraising during Covid-19, and what has changed against the backdrop of this global pandemic from both the startup and investor perspectives.
From the Investor Perspective:
Venture Partner at Wavemaker Partners
Former Co-founder and former CEO of the PropertyGuru Group, Steve is currently a venture partner at Wavemaker. He focuses on deal origination, investment decisions and helping founders of mature portfolio companies with scaling and fundraising.
CEO at Lanturn
Veli is a serial entrepreneur and leads Lanturn as its CEO. Lanturn provides online corporate services for high-growth companies in Singapore. By using cutting-edge technology to handle accounting, compliance, payroll and tax, Lanturn helps enable companies to focus more on running and growing their businesses.
Representing the Startup Perspective:
CEO and Co-Founder at Moovaz
Having co-founded and led several startups, Junxian is no stranger to the startup ecosystem. Today, he leads Moovaz — an all-encompassing relocation service built to make relocation seamless and fuss-free for global clients by leveraging on smart technology.
Watch the recap above and check out some highlights from the conversation below.
*Responses have been amended for brevity.
State of Play of Fundraising during Covid-19
Can you talk about the state of play in your business during these times? Are you seeing increased deal activities? How about fundraising requests?
Kristin (Fundnel): We are busier than ever, companies are beginning to realise this is for the long haul and companies are keen to raise cash to keep fuller warchests. But they are being careful about how they have investors view them and caveat to investors that they’re not desperate and are raising to extend the runway to maintain growth.
Steve (Wavemaker Partners): Nothing much has changed, Covid-19 put things to a halt a bit as VCs are focused on assisting existing portfolio companies. At Wavemaker, we are looking at ensuring our portfolio companies have runway for 12-18 months. For those that have seen their runway shorten rapidly, we are finding ways to support them. Funding sizes have reduced slightly. However, companies are still going to be invested in as VCs that have raised money for their funds will still be looking to deploy capital. So we’re still seeing businesses get funded, but with a greater focus on quality and decision, and this process is taking a bit longer than before.
Following on from the investors, are you seeing an uptick in fundraising?
Veli (Lanturn): For lots of rounds that closed this year, the fundraising processes started around Q3 or Q4 last year (2019). Changes in capital outflow are probably going to be felt in the second half this year, to the first half of next year. Quality is always important, and more so now than it has ever been. There has been a stronger emphasis on existing portfolio companies and companies with strong runway to survive the current reality and thrive when things bounce back .
Are investors generally still open to take meetings for new deals?
Junxian (Moovaz): Yes, though conversion rates are very low. Investors are still open to taking meetings, but deployment is as not active as it used to be. Moovaz started fundraising in Q3/4 2019, but there had been additional requirements we had to address around our business model changes with Covid-19 in the picture. Startups need to be confident and realistic about the business model to be helpful in giving investors the confidence to invest. In the case of Moovaz, we are still in the early stage — Series A — and investors are mainly looking at how the team is able to weather through this crisis.
Valuation Trends and The Need for Innovative Structuring During The Pandemic
What are some of the trends that you have seen in the last few months that surprised you? Are valuation expectations lower? Do you see more innovative structuring?
Kristin (Fundnel): Valuation expectations are lower, given the uncertainty Covid-19 has brought about. In terms of innovative structuring, we’ve been thinking about it from investors’ perspective and are aiming to bring opportunities to more investors. The questions we ask ourselves are: Can we provide smaller ticket sizes or encourage people to look at opportunities they may not have otherwise have looked at?
We are also looking into providing yield-based opportunities that give investors a bit more certainty during this period.
Steve (Wavemaker Partners): Smaller companies are doing okay.. The bigger ones that are scaling however, are the ones being affected as their runway is slashed. On both sides, valuation has been reduced. We are seeing new approaches, where there might be bridge or smaller rounds occurring prior to larger rounds with reduced valuation, and debt-refinancing happening more. There have also been tranche-based investments that saw startups raising more than they needed, and at a valuation that wasn't too affected.
Audience question: Could you please describe what a "bridge to Series A" means in practical terms?
Steve (Wavemaker Partners): If startups are raising a Series A round, and that has been put on hold, they may raise a smaller bridge round like a convertible note with a discount to the new round at a flatter valuation with the expectation that into 2021, they can restart the Series A process.
Anything you have seen that is innovative or off market?
Veli (Lanturn): There is a growing preference for debt-like structures or structures that involve that, like convertible notes. We are seeing investors focusing on being more secured, or at least senior in the cap table. This is especially for later-stage companies that have strong cashflow, or are growing briskly as it gives investors and people unfamiliar with these structures a lot more security in the event of a sale in the business or a default.
Investor Interest Against the Backdrop of A Global Pandemic
Are investors taking a longer time to say yes OR saying no faster? Or structuring deals in tranches with earn out valuation premiums?
Junxian (Moovaz): From an operator's perspective, it's hard to convince investors of bullishness amidst bearishness. As a company, we still need to prove growth, or at least the potential of it. Creative structuring may be the way to go. Other things that work well to create bullishness might be to create consolidation with peers. It's a good time to lean on and to work together with smaller companies. So while it does take some time to discover synergies, this can help to force bullishness into the round. For us, we have been cautious on what our levers are. To raise money in this situation, you definitely still have to prove optimism and have some kind of hypothesis for growth.
Fundraising Under Lockdown: Have There Been Any Changes In the Process and Execution?
With travel restrictions / lockdowns, how can entrepreneurs (especially overseas based companies) looking to raise funds reach out to capital providers like yourselves in an impactful way?
Steve (Wavemaker Partners): The current climate is beneficial for companies overseas because all pitch calls and follow ups are being done remotely, whereas previously it benefited Singapore companies more. Now VCs here can meet anybody anytime. The ability to get investors’ time is better, though conversion is lower like Junxian said. Wavemaker Ventures announced 3 to 4 deals in the last few months, and whilst these are new deals, none of them started the fundraising process during lockdown, and there was some physical due diligence process ongoing before lockdown happened. We are still doing pitch and follow up meetings, but it is definitely easier for VCs now.
How are VCs / investors conducting DD / executing deals in the current environment?
Veli (Lanturn): Anchor investors are important — it's hard to raise from people you’ve never met unless you have anchors locked in, and the right ones.
It's possible to raise from people you’ve never met, but on the strength of the business and who the anchor and co-investors are. People like to move in a pack. As a follow-on investor, you want to look at anchor investors, lawyers running the deals, people supporting the deal as part of your due diligence. Timing is probably the single biggest driver, or even the right market at the right time. The second largest driver is the team — this includes investors, lawyers and everyone who gives you credibility as an organisation.
Have you in recent times completed a transaction client that was entirely virtual?
Kristin (Fundnel): I don’t think we’ve seen anchor investors do everything virtually yet but we have seen follow ons get done virtually. Anchor investors help with price validation not just with current rounds but also with future rounds. How that’s going to impact your future rounds and having the right validation from the anchor is key.
What are some interesting ways you have done due diligence with prospective investors? Any hacks you can share on your fundraising journey?
Junxian (Moovaz): None of the investors (from our recent Series A round) have gone down to our worksite. But what I think helps is definitely having a clean data room.
Veli (Lanturn): Adding on to what Junxian said, part of what we do at Lanturn is help people build clean data rooms. 4 to 5 years ago, many deals fell apart because people didn’t have clean accounts, clean governance, documentation, and ownership structure. I have personally walked away from deals because of this. Without clean data it's hard to get a reputable anchor onboard.
Key Success Factors / Why Startups Fail to Raise Funding
Put a group of startups in a similar sector, raising a similar series of funding, talented founders, decent business model and traction…Yet, their fundraising results will be different. Is it luck? Connections? Preparedness?
What are some of the key success factors that startups that successfully raised money exhibited which produced that different outcome?
Kristin (Fundnel): Take your time to educate yourself about the process and be realistic about what that looks like in terms of size and timeline.
It is always good to come in knowing what you want and that helps investors work with you a bit. In terms of optics, having a good deck, knowing how to manage the data room, and how you talk about your story. In essence — Have a clean shop front before you sell your wares!
Steve (Wavemaker Partners): You can’t do funding halfheartedly, and time and effort must be invested to get funded. Are the founders backable? Can they articulate where they are today and where they want to go? Are they honest with their mistakes? Are they credible? Are they coachable (i.e. willing to learn,listen, and have a constructive conversation with them)? Continually engaging with investors — kissing the frog — and continuing dialogue to have warm investors by the time they are ready to make an investment.
Veli (Lanturn): Business plan and funding takes care of themselves if you get 3 things right: Product, Team, Timing. Address a problem that people want NOW, and you’ll be in a great position as a business and interesting to the VC. Ask yourself: why is my timing spot on, what’s hard to replicate about my team and why is my product great?
Looking back, what are some of the things you did or didn’t do that helped in getting your round closed?
Junxian (Moovaz): Investments are the byproduct if you have a good product and happy customers — this should be managed first and foremost. Investments are not so much about risk management, but substantiated optimism. It’s the justification behind what you’re asking for and why — have the numbers on hand and explain what that means for your business. Build the model upwards after top-down sizing. The locus of overlap is where the opportunity or market is.
As an operator, as we build projections, we care more about how we’re spending the money, making sure we’re making correct assumptions and levers around those, so we know where our strengths are and where they aren’t. It has to be able to withstand a lot of hole-poking. Justifying your raise and valuation with numbers is very important for entrepreneurs and helps conversations with the investor.
Questions from the Floor
Slightly more formulaic question. What recommendation would you have for a B2C media tech startup raising a seed round by year-end? What are the top five selection criteria from a VC from the early stage perspective?
Steve (Wavemaker Partners): It is going to take at least 6 months. I haven't really seen a fundraising process take less time than that. VCs are looking for a big pain, a big problem and the solution your idea brings. Why now and why should they invest in you? If you are able to address that, and show that you can capture some of the value then you are halfway there. Think a little bit about what is that range of investment you guys should really need for the next 12 to 18 months to get to the next milestone in a way you can justify your valuation.
On the topic of fundraising there are some startups that think “I'm not good at all these. I'm just going to hire an advisor to do that”. What are the success rates like?
Steve (Wavemaker Partners): At an early stage round, they don’t add much value and are a red flag for me. For a later-stage company, it can be really helpful for advisors to streamline and manage the process, and keep all the parties involved on the same page.
Given the WeWork saga, are VCs these days more interested in companies on a fast path to profitability, or ones with hyper-growth but slower path to profitability?
Veli (Lanturn): I think it boils down to whether the company can clearly articulate where they are right now and where they are going to be in 3 years. Do they really understand their growth model, where they are now and what does that imply from the fundraising standpoint, and from the operational standpoint in terms of how they want to get to whatever they want to go. Fundamentally you really need to understand your own business before you go speak to investors. Be realistic.
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