Enterprise Startups: Actionable Fundraising Tips From R3’s Investor Community

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:

1. Most startup investors are spending up to 80% of their time making sure their existing portfolio companies are okay.
2. As they begin to plan out potential new investments, they are evaluating which startups benefit most from the expected acceleration of digital transformation.

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.

What has been the impact of Covid-19 on enterprise startup funding in 2020, and beyond?

Lead Block Partners: David Chreng-Messembourg & Baptise Cota, Founding Partners

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.

How are investors viewing enterprise startups right now?

VU Venture Partners: Nancy Tong , VC Investor

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.

How do startups investors assess the potential longer-term risk of Covid-19? How does that affect their investments?

Outlier Ventures: Ana-Maria Yanakieva, VC Investor

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.

How can enterprise founders extend their runway right now?

Alchemist Accelerator: Ravi Belani, Managing Partner

Cashflow is the lifeblood of any business and there are many operational levers founders can use to extend runway:

1. Extend payables–Don’t pay anything you don’t need to and negotiate where you can (i.e. supplier discounts / forgiveness on leases and other major items).
2. Ask lenders to defer payments at least to no principal payments for the next year.
3. Provide discounts or incentives for upfront customer payments.
4. Draw down any credit lines you have access to (make sure to check any covenants / requirements).
5. Look for government grants / government aid programs you may be eligible for.
6. Ask you board / current investors to invest more so that you have at least 9–and ideally 18–months of cash. If they don’t want to invest, you should let them know you will cut the burn and may sacrifice growth to ensure runway / sustainability.
7. Use this as an opportunity to cut things you’ve wanted to but have put off. Cut all non-critical spend.
8. Evaluate team. Decide who you want to lay off, put on temporary leave, or retain. For those you want to retain, offer them an option of additional equity for forgoing or delaying cash compensation.
9. Freeze all non-essential spending.
10. Re-negotiate all contracted costs.

What advice would you give to enterprise founders seeking new capital?

Kenetic Capital: Jehan Chu , Founding Partner

Fundraising is clearly taking longer than usual, and investors are increasingly more cautious, given the current uncertainty. It is therefore important to demonstrate:

1. The clear fundamentals of your business and it’s agility during periods of uncertainty.
2. A Go-To-Market strategy that can realistically gain traction within 12–24 months.
3. A cost base appropriate for the current expended economic slowdown.
4. Leadership can effectively tell investors and customers their story, to win real long-term partnerships.

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.

What’s most important when enterprise startups pitch to potential investors now?

F10 FinTech Incubator & Accelerator: James Sanders, Program Manager

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.

What future trends in the enterprise DLT space are you expecting?

MMC Ventures: Asen Kostadinov, Research Manager

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.

Conclusion

• Stress test your business model and test assumptions based on the new global economic environment
• The goal is to have 18 months of runway, and assume fundraising will take longer than usual
• Valuations are being reset and it’s more important to optimize for runway than valuation at this point
• A slow response from investors does not mean a lack of interest — many are working through situations with their portfolio companies.
• Optimize your revenue model and make sure your solution directly alleviates an immediate customer pain point.

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.

Get in touch

• Looking to validate your offering with customers?
• Interested to learn more from other startup founders?
• Searching for mentors and industry experts?
• Planning your go-to market (GTM) strategy?

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.