Where did all the VCs go?

We, like many other VCs, have begun reviewing our portfolios on a regular basis in response to COVID. It will and often already has had an impact on our companies’ trajectories and runway. Safety lies in companies that can create a plan that gives them 18–24+ months before they run out of cash.

This safety comes from a large assumption: avoid the need to raise during the depths of the crisis. Doing so optimizes the likelihood of getting funded, and at a fair price. (My colleague, Guy, provided a framework for our portfolio companies to plan accordingly. You can find it here.)

It is always better to have options, and cash on the balance sheet creates those options. One of those options may be raising in the next 6–18 months. It’s unlikely the venture market will become so risk-averse that it dries up!

Fundraising cadence

In steady-state, entrepreneurs optimize fundraises based on standard cadence. They plan to raise every 18 mo. (plus or minus) coincided with when they might need capital. Some wait until they’ve hit a “qualifying milestone” (e.g. $1M, $3M, or $10M ARR). And, though it is becoming less of a factor, they avoid late summer and winter holiday slowdowns.

COVID-19 is disrupting this cycle. Across stages, VCs are reporting a drop in “top of funnel” activity in what should be a busy time of year. Many compounding factors are driving this slowdown.

Heads or Tails?

COVID will dictate companies’ fundraising strategies over the next two years. Each startup falls into roughly one of these categories:

Headwinds

Stimulus: Many companies will experience no or negative growth over the next few months. Demand for their product is either

• Elastic — Some customers will cut non-core expenses. Some prospects will pause non-core purchases.
• Inelastic but with an affected customer base — Some customers experiencing a business decrease can’t afford payments. Some prospects seeing an increase in their own business and can’t be distracted by vendors.

Growth rate: negative to flat

Example software companies: Eventbrite, Toast, MindBody