It’s no surprise that COVID-19 has caused disruption across the globe, creating major economic uncertainty and chaos in the financial sectors. Moreover, it has had profound effects across the public and private markets as investors tend to become risk-averse in unpredictable conditions.
Despite this uncertainty and the trepidation that many public investors may feel, startup fundraising is still thriving and the economy will recover- and for some sectors and industries, it is more important than ever, as a downturn can be more lucrative for opportunistic investors with dry powder.
What’s interesting is that historically some of the best fund performances occurred between the onset of a downturn and the early stages of recovery. And even under the challenging circumstances surrounding the 2008 recession, startups like Uber, Venmo, Airbnb, and Slack have been able to thrive, becoming major industry leaders.
Smart and opportunistic investors will understand that this is a prime opportunity to look at startups that are innovating to meet the new demand for health and safety solutions as well as early stage enterprises that are anticipated to remain strong due to a solid offering that will be relevant even after the environment stabilizes.
In fact, progressive online accelerator programs have moved to Virtual Demo Days that bring together 100’s of VC’s and private investors who are still very much interested in funding the “next big thing”, with entrepreneurs continuing to raise millions of dollars in capital from these events.
Outside of accelerators, startups often use conferences to meet investors and the top conferences have already gone remote. And personally as an investor, I’m excited to not be traveling and living out of a suitcase 30+ days a year. I get to spend more time with my companies, my family and friends, and most importantly with a shift to online and virtual, it has leveled the playing field for those who don’t live in Silicon Valley or New York.
Investor Shift from Unprofitable Unicorns to Profitable Acquisitions
Capital raising, especially for key sectors servicing the healthcare industry, remote work, and on-demand services are anticipated to continue to remain strong and have seen significant valuation jumps.
However, capital intensive startups that originally had models that could only become profitable after 4-5 years of massive additional capital injections will not be as strong in the short term, and many will likely fail if they don’t make massive cuts immediately. Many investors will also shift in the downturn to be more short-term return focused, versus long-term risk.
Those with dry power will thrive in an opportunist market. There will be a next Airbnb, and it won’t be able to get a unicorn valuation due to not as much dry powder in the market, which means that as an investor you can invest at a lower valuation, creating more potential upside long-term depending on how long market recovery takes.
While a percentage of private investors will focus on existing portfolios and only invest in companies with traction, foregoing early stage deals, the winners in the markets according to Warren Buffet are typically those who can afford to wait out market flux and the same is true for those who will continue to take the high risk investments in early stage startups.
Investing in the Future: What Startups Need To Know
It’s also important to keep in mind that investing in startups will still be data-driven and reflect the yearly climate, which means it may look a little different than it has in the past. The needs and demands of the market have changed dramatically due to COVID-19, and it’s almost certain that future needs can be based at least partially on trends we see now.
For starters, remote working and education have overnight become instrumental during the outbreak. Experts now anticipate that remote business and education solutions are going to continue to outpace many other sectors for the foreseeable future. Furthermore, many companies have reported preliminary results finding that remote working solutions are not only working for them, but they are considering longer-term flexibility in order to reap cost savings from changing property needs. Ultimately, this means that mobile solutions with the capacity to enable work and education needs from anywhere will be here to stay – and innovative startups in this EdTech space have tremendous growth potential.
Innovative healthcare startups are another key area in which investors may have a higher likelihood of experiencing strong and rapid growth. The market is currently demanding many COVID-19 related products, such as better testing capabilities and protective equipment and devices. In addition to this, patients suffering from many different conditions are seeking better ways to access healthcare in a way that minimizes exposure and risk. The healthcare industry was evolving to embrace telehealth solutions prior to COVID-19, but the pandemic likely means these solutions in the MedTech and healthcare arena must be made available faster, and they will likely be here to stay.
And while COVID-19 presents an opportunity for many sectors, it is hitting others much harder, such as food, hospitality, and transportation. All of these industries are facing massive losses, but in these trying times, there is also space for innovation and service-delivery transformation. Those companies and startups that are determined to find safer and more convenient ways to still meet the desires of their customer base can find massive success. Many of these companies had been considering automation in the past and now have to seriously consider it before hiring back their staff. We likely will be looking at a much more automated workforce by 2021 as businesses have been forced to adapt or die.
Startups Here’s What Investors Will Be Looking For
While there is no guarantee that any company will land an investment deal, it’s important to know that investors will look for organizations with these traits prior to committing any capital under current market conditions, including:
- Companies who truly innovate in their field, excel at what they are doing, and have a proven track record of success as a team.
- Organizations that are innovating services such as contactless and automation technologies, that enhance human capabilities.
- Solutions that benefit health, safety, and wellness for consumers as consumers are becoming more health conscious.
- All types of goods, whether B2B or B2C, as long as they are unique, have a solid profit model, and have a proven track record of sales.
- Those offering solutions in remote business and education to help put people back to work, and retrain them into new careers and skills.
In the end, entrepreneurs must continue to stay true to the basics of having a strong operational proposition, a solid business plan, and sound market strategies. It’s also crucial to understand the human capital of the startup, including the knowledge, skills, and competencies of the startup team – is often a huge predictor of future success that investors will continue to look for. It just is secondary at this point to already built products and companies with traction for many investors.
Overall, for companies who can meet these criteria, they will continue to succeed at finding funding on their own, with accelerator programs, and at conferences. In addition, entrepreneurs and investors who drive change and can make a positive impact in the current world can also find great financial success together despite the current market volatility.
Ryan Rafols is the Founder and CEO of Newchip, the only REMOTE accelerator program for scaling Pre-Seed to Series A startups.