Surviving the Pandemic: How Investors Will Continue to Fund Startups Despite Economic Challenges

The ongoing global pandemic, driven by the novel coronavirus, has brought unprecedented uncertainty to the business world. This uncertainty has affected various sectors, including early-stage ventures and early-stage investors. Despite the challenging economic environment, investors are continuing to fund startups, albeit with some modifications in their approach.

Economic Impact on Startups

According to recent surveys, while investment in startups has experienced a dip, there are still funds flowing in, albeit with more stringent criteria. In a survey conducted by a US VC report in June 2020, it was found that out of 150 VC firms, only 56 have not yet completed a fully remote deal, while 92 are still working on deals remotely—69% of which are comfortable with fully remote transactions without face-to-face meetings. This indicates that despite the pandemic, there is still significant interest from investors in seed and venture capital funding.

Investor Response and Strategy

Investors are responding to the new normal with a more cautious and strategic approach. While some fund managers have adopted a passive stance, the majority are continuing to evaluate investment proposals but at a slower pace. The focus is shifting towards existing portfolio companies for crisis management, with a more microscopic approach to evaluating new proposals. These changes are due to several key factors:

Shift in Focus

Guiding Existing Portfolio Companies: Prudent Use of Funds: Evaluation of proposals is more in-depth, with founders who have a deep understanding of this fact being better placed to secure funding. Challenges of Remote Work: Working from home is not as efficient as in-person meetings, especially considering the added responsibilities and inefficiencies. Fund Age: Newer funds are not changing their allocation strategies, while older funds are more inclined to support existing companies.

Trends in Investor Behavior

The investor behavior is showing several key trends, which startups and founders need to be aware of:

1. Fewer Deals

The bar for new investments has been raised significantly. Investors are more interested in:

Well-Known Markets: Focusing on markets they are comfortable with or familiar with, often leading to a more sector-specific approach. Excellent Founding Teams: Prioritizing those with experience and previous relationships. Companies They Have Been Tracking: Investing in companies or teams they have been actively monitoring for a long time.

2. In-Depth Evaluation Process

The evaluation process is becoming much more rigorous, leading to longer turnaround times (TAT) for new deals. This is due to:

Less Focus on New Opportunities: Spending more time with existing portfolio companies. Logistical Challenges: Extra logistical challenges due to social distancing and quarantine measures. Relaxed Competition: Reduced competition providing investors with more time to complete deals.

3. Lower Valuations

The economic slowdown and increased uncertainty are leading to aggressive adjustments in valuations. On average, valuations are expected to drop by about 30%. Despite this, there is still significant interest from investors, but the risk is higher, leading to lower valuations.

Future Outlook

The recovery timeline is uncertain, with some investors predicting a full rebound by 2021, while others expect a longer-term impact of 18-24 months. In the meantime, existing funds will work more prudently, with short-term recovery based on their support for existing companies.

To adapt to these changes, startups should:

Strengthen their positioning in the markets they are familiar with. Highlight the experience and track record of their founding teams. Showcase the progress and traction of their company, especially if they have been tracked for a long time.

Overall, the key is to remain adaptive and strategic, understanding the new investor landscape and focusing on what truly adds value in these unprecedented times.

By: Ayush Dadhich Manas Vashistha

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