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Funding during business as unusual

The global economic turmoil that we are currently seeing, caused by COVID-19 and its aftermath, causes significant challenges to funding-dependent startups and scaleups. In the Netherlands, investments in startups decreased from €420 million in Q4’19 to €150 million during the lockdown in Q1’20, according to KPMG. Luckily, more recent times show signs of recovery. In the first half of 2020, Dutch startup investments reached a record-breaking €460 million. That exceeds the same period last year by almost €70 million, Golden Egg Check startup analysts show.  Worldwide, private market funding for startups is expected to decline throughout 2020.

While founders are wondering when, how, and where to get cash to keep their business alive, Venture Capital firms (VCs) are massively announcing that business is ‘as usual’. What’s going on?

Investing in uncertain times

With COVID-19 still being around us, the uncertainty from earlier this year will continue to plague businesses. Pieter Welten, a partner at Amsterdam-based Prime Ventures, confirms this trend. He tells Silicon Canals he believes most companies will remain cautious concerning funding, recruiting, and expanding – at least until we know what the future holds. Although private investors remain interested in innovative businesses, they are more careful in their decision process, research by Rabobank and KplusV shows. Currently, investors analyze the impact of the crisis on business models. They will investigate whether businesses can bridge this period and the upcoming recession with the available cash flow. Patrick Polak, a partner at Newion in Amsterdam, states: “To convince investors, you must show realistic projections and show the ‘COVID-19 robustness’ of your business.”

On a brighter note, Polak states: “We do see that deal flow is returning. Actually, deal flow in Q2 was 50 percent higher compared to Q1 2020.” According to Polak, more companies are seeking investment because they want to grow faster. Slowly but surely, things seem to go back to normal.

German entrepreneurship researchers Kathrin Burmeister-Lamp and Tom Orben believe classic VCs will continue to invest. However, they might only select startups that will survive financially. Corporate VCs (CVCs), on the other hand, will reduce their investment frequency and amount: their parent companies will direct available resources toward sustaining themselves. The numbers do not lie: in Q1’20, global CVC-backed funding fell to $34B, a decline of 13% compared to Q4’19. This continued through Q2’20, when the number of CVC-backed deals reduced by almost 30%. As a consequence, the academics advise: “Founders should, therefore, take a close look at how long their liquid assets will last and not count on further financing at attractive conditions.”

Current needs

According to Brendan Hill of Antler, a global VC firm, VCs are looking for 18-24 months of cash runway. He states founders should, however painful it may be, cut their burn rate: for instance, by freezing new hires, implementing pay cuts and trimming staff. Furthermore, companies should try adjusting their service or product to the needs of healthcare software, remote working and education, and small businesses impacted by the shutdown. Indeed, a global survey of 139 VCs and angel firms revealed an increased interest in investing in areas like healthcare (46%), remote work solutions (42%), logistics (32%), and productivity software (28%). In the Netherlands, investment preferences do not seem to have changed, with (high) tech, manufacturing, medical technology, and key technologies remaining the most popular.

Focus on the future

To come out of a crisis stronger, founders must focus on the future and adapt to the new reality, KPMG states. In the third quarter of 2020, VC investors will continue their search for companies with a clear outlook on their competitiveness and planned investments. Investors across Europe have lowered the frequency of their transactions and are taking more time to conduct due diligence. It is all the more vital that founders assess changing consumer behavior and how this could affect the future of their offerings and business models. Indeed, Melissa Guzy of Arbor Ventures states: 

“This is a time to stop and think about what is next and what significant opportunities will exist. Founders who can escape the noise and capitalize on the needs of a new world order will build great companies.”

The NRC foresees the following economic trends after the pandemic: increased self-sufficiency, a focus on regional products and a call for less CO2-intensive economic growth – such as developing the economy post-COVID-19 using ‘Doughnut Economy’ principles, like Amsterdam will. Faster digital disruption and increased appreciation of Big Tech are expected as well. The website Emerce expects experimentation with innovative services to expand quickly, for example in Living Labs in Amsterdam and Eindhoven. An increase in business design thinking, i.e. constant testing combined with thinking about customer needs and customer experience, is forecasted as well. In March, Mark Rutte and his European colleagues already stated that ‘green’ and ‘digital’ will be the cornerstones of the EU’s economic recovery.

Even though COVID-19 has changed funding landscapes worldwide, VCs have still expressed interest in companies that see opportunities both during and after the pandemic. It is therefore essential that founders keep the latest societal developments in mind and stay focused on the future. Taking advantage of forecasted trends may help your business thrive and recover after the current pandemic. 

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