8 Tips for Startups Finding Funds in a COVID-19 Era

Posted by Elisabetta Ferri on Feb 22, 2021 08:08: AM
Elisabetta Ferri

The COVID-19 virus continues to hurt the global economy, and it is hard to predict how long the global economy will be affected by the pandemic.

The continuing lockdowns have resulted in job losses, supply chain issues, travel bans, and worldwide market disturbances. Because of this, looking for startup funding during the COVID-19 pandemic is more challenging than before. However, it is possible, and it made several aspects of startup financing even more manageable.

In this article, I will give 8 tips for startups to find funds in this pandemic.

How to get funding for a startup

It has been a year for startups to look for funding from VCs and other sources of funding. Fewer than half of the seed-funded businesses earn Series A funding even without a global recession. And with 68% of investors thinking that early-stage investments would be affected by the pandemic, many business leaders expected that figure to drop much further.

However, amid early predictions regarding COVID-19, investors continued to engage with startups, with some sectors seeing even more investment due to the pandemic. Funding cycles and rounds of investment continue to look just as they did before: they invest when VCs find the right match

Yet, they take more time to make choices. Pitch teams need to do more to build confidence, provide context, and generate enthusiasm for their companies in the age of remote operations and virtual pitching.

 

Here are the 8 tips for your startups to find funds in a COVID-19 Era.

 

Be ready for a more competitive market for startups investments.

While most entrepreneurs dream of having a market all to themselves, research shows that you're probably better off with some company. Series A and previous financings have declined by almost three-quarters, and capital has moved to later-stage transactions. Increasingly, venture capitalists hold much of their capital back for late-stage investments. The proportion of funding for Series D and E+ in April was the highest in two years. Some of the most popular investments were the internet, new media, software companies, and e-commerce-driven consumer products.

Family and relatives funding can be critical to later financing rounds.

Startup founders typically invest their own money and raise seed capital from friends and family. These funds can be vital to discovering, seeking, fit for the product market, and demonstrating success through early acquisition or revenue for consumers.

Professional investors often see friends and family investments as a strong motivator to make the business prosper, given the discomfort that most individuals would feel about losing their loved ones' money.

Since founders often don't feel comfortable negotiating with friends and family, you may use "most favoured nations" SAFE (or Simple Agreement for Future Equity) to record the investment simply and equitably.

Have a clear market opportunity and the ability to calibrate.

Market size is essential. The market your startup is approaching needs to be producing a billion bucks or more in revenue and multiplying. Companies need scalability, or the ability to exponentially expand with declining marginal costs, to hit the market cost-effectively. That's why software startups are attractive to VCs.

Build a strong team.

You need to speak about your track record, domain knowledge, and personal experience, particularly any stories that show how hard you are willing to go to make the company succeed. It is also critical to have a well-rounded team with the experience and resources to develop the business.

It is also necessary to keep your team engaged. Your team depends on you, so keep them informed about every development. You can keep your team members involved and remain connected with them via video conferencing software like Zoom and Google Hangouts. Maintaining high spirits within the team and knowing the general mood of the remote employees is very critical.

Understand how valuation is vital to avoid dilution.

Dilution happens when a company issues new shares, resulting in a decline in the percentage of ownership of the company's current stockholders. The possibility arises with each new financing round that previous investors and founders will see their equity stakes diluted or reduced by the terms negotiated with new investors to a smaller share of overall equity.

At different stages, getting a sense of the startup's valuation can help founders avoid some of that dilution. Of course, valuation is specific to each business, but it can also be roughly linked to the business stage.

Add at least 6 months to your fundraising timelines.

In the world of COVID-19, startup war chests need to be larger to last longer. Before March, it would have been appropriate for a company to close an angel funding round to guarantee it had 12 to 18 months of operating funds on hand.

VCs are now asking their portfolio companies to rewrite their estimates to include capital for 18 to 24 months. That is because it is likely to take 6 to 12 months for the next round to close. Ensure you are entering funding discussions with future investors with six to 12 months of runway in the bank.

Get expert help in negotiating terms sheets.

To help you navigate investor deals, search for a lawyer who works with early-stage startups. They can include fee deferral and flat-fee agreements that make them more affordable for early-stage startups. Someone with deal management skills is worth it.

Not only can they help you avoid complications and negotiate valuations, but they can also lead you through other complicated but significant considerations. For instance, they will help you think about the board's composition and how to manage those rights that investors will choose to obtain, such as pro-rata rights or information rights.

Choose your investors carefully

Experienced legal counsel can promote the hunt for investors. Still, there are other routes that entrepreneurs may take to get in front of VCs, including LinkedIn, events (though pre-COVID-19 may have been more efficient), and pitch contests. Please get to know them once you have some potential investors lined up.

Summary

Right now, raising funds continues to be a time-consuming and challenging process, but the situation is slowly improving. Investors got over the initial shock and are now able again to recover. Eventually, with a stronger sense of personal empowerment and enhanced relation to our society, we will rise on the other side of this pandemic, both of which will benefit our companies in the future.