By David Vatchev, Venture Development Lead EMEA, R3
As a result of Covid-19, the unprecedented uncertainty in 2020 has turned startup fundraising on its head. Many early stage companies are left wondering how they can continue to grow out their business when access to capital is seemingly frozen.
Two key trends have emerged around early stage fundraising:
The R3 Venture Development team supports early stage startups building on Corda. We tapped into some of the Venture Capital (VC) investors, accelerators, incubators and capital raisers in our community to get their insights on the key questions startups are asking in these uncertain times.
If you are an enterprise startup looking to raise your next round of funding, then this post is for you.
The impact is very clear. Global VC funding has fallen over 20% since March both in terms of deal size and quantity, while valuations have dropped by up to 30% reflecting the expected revenue declines and future business uncertainty. Moreover, corporates have also been heavily impacted with their top-line growth falling, while their cost base remains.
The due diligence process is now taking more time and VCs are becoming increasingly selective, given more of their time is now spent on their portfolio companies. While there is a lot of talk about the VC “dry powder”, funds are in no rush to deploy capital and instead looking ahead to the emerging winners from digital transformation.
Looking forward, startups utilizing Distributed Ledger Technology (DLT) can optimize workflows, reduce costs and offer new revenue streams to enterprises will remain best positioned to attract new funding.
Investors are being more careful about the product-market fit: deciding whether or not this is something essential (a “must have”) in the current environment.
Startups looking to fundraise need to make sure their revenue model is aligned with their customers’ success and the solution directly alleviates an immediate pain point.
With the current economic downturn, enterprises will cut down their budget for enterprise SaaS, hence it is important that startups are building something essential.
Many people are trying to predict what the future of work, entertainment, healthcare, transport, travel and supply chain will look like.
VCs are aware nothing is going to be the same. What really matters is to what extent the current changes will transform into long term changes, a most obvious example is remote work environments.
Some VCs have stopped investing to see which trends will indeed be adopted, while others continue deploying capital at full speed. It really is a very broad spectrum and dependent on factors like market uncertainty, LP cohort, mandate, portfolio size, lifecycle of the fund.
Cashflow is the lifeblood of any business and there are many operational levers founders can use to extend runway:
Fundraising is clearly taking longer than usual, and investors are increasingly more cautious, given the current uncertainty. It is therefore important to demonstrate:
Assess how you qualify investors, so your offering is directly relevant to them and you can maintain flexibility with regards to funding round size and term structure.
Prove to your investors that your startup is an attractive long-term investment opportunity. The core aspects investors consider when evaluating opportunities have not changed much.
An exceptional team, a differentiated product/service, effective go-to-market strategy and a unique value proposition within a large addressable market remain as important as ever.
A key trend over the past decade has been the digital transformation of most industries. The Covid-19 crisis underscores the need for true digitalization (as opposed to merely replicating offline processes on a digital medium) across all industries by showcasing the vulnerability of the current system. DLT is compelling as an enabling architecture for digital transformation, especially when combined with other technologies such as IoT and machine learning. Hence, the current shock could further increase enterprise interest in DLT/digital assets and accelerate adoption.
As we discussed in detail in our recent analysis of the UK DLT ecosystem, an encouraging trend in enterprise DLT over 2019 has been the broader adoption of the technology, outside of financial services. We are looking for that to continue with verticals such as regulation & compliance and supply chain & logistics being prime candidates for growth.
A big thank you to our investor community who contributed to this post. We wanted to bring as many views together as possible, creating the broadest picture of the current fundraising landscape. We hope you found these recommendations insightful and applicable.
The R3 Venture Development team is committed to accelerating and cultivating solutions built by startups and entrepreneurs at every stage of their blockchain journey. We offer content, workshops, technical support, introductions and more. To learn more or to join our ecosystem visit r3.com/venture-development.
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