Entrepreneur toolkit: Is now a good time to fundraise?
It would be a considerable understatement to call 2020 unprecedented, but from the Covid-19 crisis to climactic climate events, elements…
It would be a considerable understatement to call 2020 unprecedented, but from the Covid-19 crisis to climactic climate events, elements of this year have — and continue — to reshape our way of life. But innovation continues, and entrepreneurs have continued to build, many of them striving to meet these novel challenges or other persistent problems across industries as varied as retail to healthcare. Capital and counsel remain constant constraints, and so one of the questions I’ve been asked most frequently is: Is it still possible to fundraise? Or, its cousin: How should I approach fundraising differently in this environment?
To be sure, much has been written about reduced access to funding (my colleague Tyler notes how investment activity in fintech tightened 30% from Q1 to Q2 this year). And due to lags in reporting cycles, we won’t be able to fully assess the impact of Covid-19 on fundraising for at least another year. But we think there’s some value in taking a step back based on what we’re seeing today.
And there’s actually good news: Many rounds are getting done quickly, early, and volume is as high as ever — especially for businesses at the early stage that are gaining traction and more mature businesses that are scaling. Funds are still being invested at a significant pace, and businesses with sound fundamentals are raising at valuations that are on par with 2019 levels. According to PitchBook, for example, median seed-stage pre-money valuations in H1 2020 were $7.5 million, which continue to be at all-time highs. And with high valuations, we’re also seeing that the spread between the median to top quartile is widening, which is really interesting to see. At the early stage, the median pre-money valuation was $30 million, with increases across the board. Deal count is lower, but the valuations remain robust — as do the annual increase and the annualized percent increase in valuation between rounds, which tracks with what we’ve seen here at Redpoint. The picture is even rosier for late-stage valuations: the median pre-money valuation through June 30 reached $110.6 million in the second quarter, while the average has so far doubled the full-year 2019 figure, according to PitchBook. Though this is in part weighted by mega-rounds, it still signals strength in the ability to get good deals done.
Great businesses — at both the earliest and later stages — will continue to have opportunities to fundraise. So I like to turn the central question around: Is it a good moment for your business to raise? That is, can you demonstrate traction and a path to sustainable growth?
Here’s a breakdown of what we have seen both from our own experience as well as from our portfolio companies that have raised. In short:
It is a great time to be fundraising. We at Redpoint, and VCs more generally, are open for business and excited to invest.
This is particularly true if you have best-in-class metrics. Valuations continue to be at or close to 2019 highs, with strong premiums for best-in-class companies.
Zoom pitching is different. A small 2x2 tile may be the primary — if not only — interaction and experience with a potential investor. That means it’s important to get comfortable with that medium, because the little things matter and are magnified digitally. It sounds simple, but make sure you are looking at the camera (vs. another screen), have engaged body language, and a tight narrative. In some ways, best practices matter even more.
But metrics still matter. It’s still important to have metrics that indicate product-market fit, specifically at the Series A stage.
A great deck remains critical. A deck that conveys your company and story in the best light still key. (For more on that specifically, we’ve broken down the 10 essential elements of a great deck here.)
Covid’s impact has been uneven — but is relevant. The pandemic has impacted some businesses for the long term. Others were affected in the short-term but have seen strong signs for recovery. Still others do not seem to be affected at all — or are even accelerating. Key questions you’ll confront — and the context that will serve as the backdrop — if you’re fundraising include: How has the market affected your industry and company, if at all? What are you doing to catalyze available opportunities? Is this a sustainable advantage?
Regardless of what’s happening in your business and whether you decide to fundraise or not, it’s critical to bear in mind that this is still a long-term relationship. Take the time to get to know your investor and vice versa — because yes, that’s still possible virtually. Spend time together, do references, develop conviction that they are the right partner. This remains a good time to fundraise, even if it is an unprecedented year, but it’s just as important as ever to find the right alignment.