At the beginning of the croronavirus pandemic, startups and investors took a cautious approach. Two months later, they say the crisis might breed more innovative — and profitable — companies.
Adaptation has been the key, they say.
Companies that have shifted to building cloud-based software and products to help people work from home have thrived compared to firms that rely on travel, events or face-to-face contact to drum up sales.
Still, the economic uncertainty wrought by the pandemic has some investors waiting and holding onto their cash for now.
And with fewer active investors, companies will have to be in a strong position to attract new funding, said Pat Matthews, founder and CEO of Active Capital, a San Antonio-based investment firm.
“The bar has really been raised for companies that are raising capital,” Matthews said. “A lot of investors are looking very specifically for how companies are going to operate in the new world. Not just whether they’re going to be more capital efficient … but also what’re you building? And how relevant is it in the new world we’re going into?”
Matthews’ firm has remained at work, and in April invested in eight of its portfolio companies and three new ones. Active Capital also closed two fundraising rounds and conducted one merger last month.
Broadly, angel investors — wealthy individuals with a willingness to take risks on young companies — are likely to shift away from putting money into startups in their earliest stages.
They may see more opportunity in real estate or mergers and acquisitions of existing companies, said Luis Martinez, director at the Center for Innovation and Entrepreneurship at Trinity University.
Investment funds are prioritizing companies that will have a greater relevance in the future.
“What we’re seeing with early-stage hedge funds,” Martinez said, “is they’re just kind of shifting deal flow to companies … where you can make an investment now and you get them on to the next level within the next six to 12 months that really positions them to take advantage in the post-COVID world.”
Sendspark is a San Antonio-based startup that was founded in January 2019.
The technology company, which received a $300,000 investment from Active Capital last fall, helps businesses connect with their customers by sending personalized videos designed to stand out from traditional emailed sales pitches.
With organizations having to rely on more virtual contact, Sendspark saw its usage over the first month of the stay-at-home orders grow by 200 percent to about 3,000 monthly users, company co-founder and COO Bethany Stachenfeld said.
Before the outbreak, Sendspark targeted B2B, or business-to-business, companies.
“But over the last few months we’ve also seen a lot of sign-ups in the nonprofit, education and consumer spaces, as people are looking for new ways to replace in-person events and connect with customers online,” Stachenfeld said. “At first, there was a wait-and-see approach, but it already seems like investors are back to writing checks, especially in the ‘future of work’ category.”
Still, it’s been a crash course over the last two months for entrepreneurs, like Stachenfeld, who have had to learn how to pitch their business plans over webcams.
“We already have entrepreneurs that are training on how to pitch virtually, and how to do virtual meetings,” said Martinez, who’s also the founder of Students + Startups. “We’ve got investors doing the same thing, pivoting into asking, ‘What does due diligence look like remotely?’”
Matthews of Active Capital described ending face-to-face meetings with entrepreneurs as “our biggest adjustment as an investment firm.”
“We had a hard and fast rule that we would get to know them, do our due diligence, and we always liked to break bread and meet the company in person before actually making a final decision,” Matthews said. “We had to get comfortable skipping that step, which was a little bit of a challenge.”
But for startups, the move to virtual communications could provide a needed boost by reducing the importance of where you’re located.
“This new remote-first world levels the playing field for companies located outside of Silicon Valley and New York City,” Stachenfeld said. “Not only are we able to connect with investors all over the world without any travel, but there are also new fundraising events online that we can participate in that didn’t even exist three months ago.”
She said Sendspark pitched at the first-ever Fundraise from Home virtual demo day earlier this month, which Stachenfeld said was “an awesome opportunity to meet top-tier investors.”
Both Matthews and Stachenfeld said they expect the downturn to cull inefficient companies and produce leaner firms that are less clustered geographically.
“I agree it’s more important than ever for startups to be on top of their financials. To be secure, we have to have a clear path to profitability, not just our next funding round,” Stachenfeld said.
“At the same time, I’ve always been a fan of the saying, ‘Constraints breed creativity.’ I believe that tight budgeting will force founders to focus on the things that really matter to their customers. So, in a way,” she said, “there might be more creative innovation than before.”