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How Startups Can Navigate the Change in Investment Climate Due to COVID-19

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April 06, 2020

With the rise in regulations and restrictions surrounding COVID-19, we’ve entered unprecedented times on a global scale. On our end, we hosted our first-ever Digital Demo Day to ensure the safety and protection of our team and founders. Using YouTube Live and recorded presentations, as well as an investor-founder Slack channel, we found success in this new format. We registered over 5K unique views during the Demo Day live stream, and over 1,300 investors joined the Slack channel to chat with our founders. If you missed the event, watch it here.

The challenge remains, however, of navigating the current investment climate, and we want to help our founders as much as possible in this unknown landscape. To do so, we surveyed investors in our community to find out how COVID-19 will change the early-stage investment climate.

Download the full survey results here.

We received responses from 139 investors who answered ten questions on COVID-19 and early-stage investing. From these responses and our knowledge of the investment world, we’ve gathered insights for startups looking to navigate investment during this time. 

A brief overview of The Impact of Covid-19 on the Early-Stage Investment Climate

The majority of survey respondents were venture capital firms or angel investors who noted that COVID-19 will change investment activity and planning. Just as many of us are watching how developments play out, many investors still do not know exactly what will change in their 2020 plans, but 26% of survey respondents indicated that they will continue the investment allocation planned prior to the COVID-19 outbreak, and 53% of respondents will invest in the same stages as planned prior to COVID-19.

We know that this health crisis may, unfortunately, hurt investment: 32% responded COVID-19 will have a negative impact and 36% answered it will have a somewhat negative impact. And the average investor surveyed believes the impact on early-stage investing of COVID-19 will last from one to two years.

Investor interest is, however, rising in specific industries affected by COVID-19, including healthcare (47%) and remote work solutions (42%). 

Responding to investment changes

Before addressing the current situation, It’s important to note that there was a record number of VC funds raised in 2018 and 2019. The majority of these funds are still in their active investment period, and many may continue to make investments for the rest of this year and into 2021, assuming typical active-investment periods (Source: Pitchbook). In the past two years, we’ve seen historic levels of active seed and Series A funds, which means it’s not all negative news for capital availability at this point.

Source: Q4 2019 Pitchbook-NVCA Venture Monitor

However, investors must now navigate market changes as well as the pandemic’s effects on a global scale, which may impact investment activity. VCs now have to not only meet founders remotely, but they also have to make decisions among the firm remotely, which could contribute to the slowdown in investment. I believe the slowdown may continue at least for the next two-to-three months due to the adjustments these VCs have to make. And while there is capital available, founders have to take time to consider next steps.

The true impact of COVID-19 and the current market fluctuations may be felt more in 2021, which means startups should prepare now. There may be less active funds in 2021, as total funds raised in VC for early-stage may take a large step back from the record highs we saw in 2018 and 2019. (TechCrunch

I recommend that startups focus on their customers, manage burn, and strap in for the next 24 months. This advice aligns with what the investors surveyed noted will help startups most during this time: decreasing costs, increasing runway, and focusing on the consumer. 

Focus on the consumer

Now is the time to keep the spotlight on the customer, consumer needs, and consumer demands. Your product should revolve around them, so be wary of making any changes or pivots that could negatively impact their experience. Your startup should fit a consumer need and gap in the market, so stay on that track and continue to measure KPIs that show customer satisfaction in your product or service. Focus on providing pain killers, not vitamins. In any economic downturn, non-essentials are often the first to be dropped by customers. It is more important than ever for venture funded companies to become an actual business and build on revenue.

Decrease costs, increase runway

To prepare for a downturn in investment, cut the low-hanging fruit. Unnecessary costs and spending should be evaluated and eliminated at this point. Because investment will likely slow down significantly next year, startups will need to increase their runway to last longer than expected.

Strap in for the next 24 months

While we don’t know the exact investment projections for the next two years, and I suggest that startups plan on an altered investment climate for the next 24 months. Preparing for this now will help companies stay afloat if capital availability wanes.

Unprecedented times

As I said in my talk during our 500 Digital Demo Day, these are truly unprecedented times, but great startups are born regardless of the cycle. Some of the startups that you see today will become our next unicorns and centaurs; in fact, probability tells us that’s likely the case. 

500 Startups stays committed to helping our community navigate these unknown times in the investment landscape. For more information on how early-stage investment may change due to COVID-19, download the full survey results.

Disclaimers:

THIS POST IS INTENDED SOLELY TO PROVIDE INFORMATION REGARDING 500 STARTUPS. ALL CONTENT PROVIDED IN THIS POST IS PROVIDED FOR GENERAL INFORMATIONAL OR EDUCATIONAL PURPOSES ONLY. 500 STARTUPS MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR INFORMATION CONTAINED IN THIS POST AND WHILE 500 STARTUPS HAS TAKEN REASONABLE STEPS TO ENSURE THAT THE INFORMATION CONTAINED IN THIS POST IS ACCURATE AND UP-TO-DATE, NO LIABILITY CAN BE ACCEPTED FOR ANY ERROR OR OMISSIONS. UNLESS OTHERWISE STATED IN THIS POST, ANY PREDICTIONS, FORECASTS, CONCLUSIONS, VIEWS OR OPINIONS EXPRESSED REPRESENT THE CURRENT VIEW AND THINKING OF 500 STARTUPS WITH REGARD TO THE SUBJECT MATTER THEREIN BASED ON INTERNAL DATA AND/OR ANALYSIS WHICH HAS NOT BEEN INDEPENDENTLY VERIFIED.

UNDER NO CIRCUMSTANCES SHOULD ANY OF THE ABOVE CONTENT BE CONSTRUED AS LEGAL, TAX OR INVESTMENT ADVICE FROM 500 STARTUPS OR ANY OF ITS AFFILIATES. 500 STARTUPS DOES NOT GUARANTEE ANY FUTURE RESULTS FOR ANY DECISIONS MADE BASED IN WHOLE OR IN PART ON THE CONTENT OR INFORMATION CONTAINED IN THIS POST. ALL READERS OF THIS POST SHOULD CONSULT WITH THEIR OWN COUNSEL, ACCOUNTANT OR OTHER PROFESSIONAL ADVISORS BEFORE TAKING ANY ACTION IN CONNECTION WITH THIS POST.

UNDER NO CIRCUMSTANCES SHOULD ANY INFORMATION OR CONTENT IN THIS POST, BE CONSIDERED AS AN OFFER TO SELL OR SOLICITATION OF INTEREST TO PURCHASE ANY SECURITIES ADVISED BY 500 STARTUPS OR ANY OF ITS AFFILIATES OR REPRESENTATIVES. FURTHER, NO CONTENT OR INFORMATION CONTAINED IN THIS POST IS OR IS INTENDED AS AN OFFER TO PROVIDE ANY INVESTMENT ADVISORY SERVICE OR FINANCIAL ADVICE BY 500 STARTUPS. UNDER NO CIRCUMSTANCES SHOULD ANYTHING HEREIN BE CONSTRUED AS FUND MARKETING MATERIALS BY PROSPECTIVE INVESTORS CONSIDERING AN INVESTMENT INTO ANY 500 STARTUPS INVESTMENT FUND. 

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