Private Markets: Raising venture capital in turbulent markets

No-one can deny that we are navigating uncharted waters at the moment. On the surface there are similarities to the GFC but the sudden and brutal financial shock experienced directly by individual people and society as a whole, has much deeper and further reaching consequences. It’s been very interesting, and quite confronting, to see the reactions and emotions surfacing from a broad variety of private companies and business owners, whose worlds, as they know them, have literally crumbled overnight.

We’ve witnessed frustration and despair at one end of the spectrum and a cautious, yet optimistic view at the other end. What has been really encouraging to see is many colleagues and market participants coming together to collaborate and help each other. 

Investor Landscape:

We are seeing greater distinction between investors who are “Open for Business” or “On Hold”. 

“Open for Business” - investors who are continuing to monitor and manage the risks associated with the current environment and are actively looking to invest. 

“On Hold” – investors who are not investing at this time or not reviewing new opportunities.

Investors who are still looking for investments have also highlighted they are actively seeking defensive sector themes and ESG investments is still very high on the agenda across all investor classes.   

Founders / CEO’s / Early Stage business owners seeking capital:

Over the past month, we saw an initial quiet period as investors adjusted to working within the home environment. These investors have now ‘resurfaced’ and are very focused on resuming their investment activities.

We would highlight that those investors who have said they are still ‘Open for Business’, are proceeding with caution and have tightened up their investment criteria to reduce risk exposures.

Investment criteria is being held up to greater scrutiny in the current market environment, some examples of our experience with investors below:

• Investment Mandate: Investors that may have previously provided a degree of investment mandate ‘leniency’ in order to fit a particular investment into their portfolio are now applying a much stricter investment filter. One investor cited they are “now very much focused on and sticking to our core knowledge base and competencies”.
•  Valuation: This is a sensitive topic. In distressed markets, it’s natural that investors are seeking to capitalise on the perception of less capital availability producing great ‘buy-in’ opportunities, including valuations. Founders whose companies are sensibly priced, take into account the current environment, can clearly articulate the rationale and methodology supporting their valuation, stand a much better chance of successfully raising.  Be prepared and know your figures inside out. 
•  Timeframe: There is typically an unrealistic view for how quick capital can be raised even in a regular market. We have found raising capital is taking longer in this market environment, so start earlier than planned, be realistic and understand that investors have additional pressures demanding their attention at this time. Some founders who have raised the majority of funds for their specific investment round (>c.75%) have elected to close their rounds early.
•  KPIs / Milestones: Be prepared to be adaptable and open to stricter measures of your performance and milestones prior to funding being agreed. It may take longer than expected whilst the investor gets comfortable.
•  Quantitative Criteria to Invest: Investors have cited they are looking for companies who have greater durability in the current environment in terms of financial position, performance metrics and documentation than normal: balance sheet strength, cashflow reserves, debt / equity mix, contingency/business continuity plans, compliance, board composition paperwork. “Good luck if you don’t have a Covid-19 plan in place!”
•  Scale up vs Seed: We are seeing fewer raises being launched and successfully executed.  Scale-up stage is still being favoured over seed. This may also be because founders are reticent to launch seed funding rounds in this environment citing: “it was difficult to get seed before this hit (virus), now it is very tough, and we will hold off”  

It’s ironically a great time to network, albeit digitally. With more people working from home, we have seen an increase in inbound enquiries and people reaching out more generally ‘touching base’. People have cited they “have more time on their hands and are looking to broaden their networks”. Many have acknowledged that they have had change to their approach to interactions with colleagues, opportunities and networks. This also obviously includes investors!!

The key takeaway is that business is still being executed, investors are still seeking investment opportunities and a new way of working has opened up many opportunities which may have not been as prevalent before. 

In closing, Thames Capital is embracing remote working and still very much ‘Open for Business’.