Maintaining cash flow is vital yet tricky for startups working to survive the COVID-19 pandemic. According to the New York Times, more than 50 startups have cut or furloughed an estimated 6,000 employees. Raising capital with a looming recession will prove to be a challenge, as evidenced by the last recession when overall U.S. venture funding dropped by 50% from Q1 in 2008 to Q1 2009.
- Private investors, institutions, and foundations are continuing to deploy capital into funds.
- VC transaction volume is expected to decline throughout 2020.
- Atento Capital and Zeal Capital Partners are moving forward with the close of new funds.
PitchBook released a report on April 1 analyzing COVID-19’s impact on the current venture capital. The report predicts a decline in VC transaction volume and an added layer of scrutiny from investors eyeing new deals as they reserve capital for their most promising portfolio companies.
“We’re in uncharted territory and everyone’s business is very much unusual,” said venture capital and angel investor Monique Woodard. “Companies currently fundraising should expect longer response times and some difficulty in opening up new relationships with VCs and angels.”
Woodard’s latest investment closed in mid-March along with an M&A deal that same week. More than 60% of her investments are in companies with at least one underrepresented founder. Although she’s exploring new founder connections on a limited basis, Woodard says she’s focused her energy on ensuring that the companies she’s invested in are in a good cash position and working to identify which measures to take in response to the economic downturn.
“That means understanding their burn rate, advising them on how to lower burn, and getting them to 18-plus months of runway, and also exploring new sales channels and revenue opportunities,” she said.
Investors Press Forward Despite Current Conditions
As parts of the U.S. prepares for a “peak” in coronavirus cases, a number of investors are moving forward with the close of their latest fund despite economic slowdowns.
“When there is widespread illness and death, it causes fear—rightfully so—and causes capital to dry up for a variety of reasons,” said Chandler Malone, head of Entrepreneurial Development at Atento Capital. “This makes it harder for venture fund managers to raise capital and makes both investor capital and customer revenue harder for companies to come across, ultimately affecting the entire ecosystem.”
Atento Capital is a Tulsa-based investment fund that provides direct venture capital financing to companies and early-stage venture funds. While the fund is returns focused, Malone says there is a mandate to provide local economic development and job creation in Tulsa.
“Last week, we took a step back from our investing work and put our brainpower towards devising solutions to help those in Tulsa impacted by COVID-19,” Malone told The Plug in an email. “We are working with both local and national organizations to provide PPE (personal protective equipment) for all of the healthcare workers in the region and collaborating with national organizations to create workforce development and retraining solutions for the unemployed in Tulsa.”
Atento recently launched its Entrepreneur in Residence program, targeting emerging entrepreneurs and pre-seed stage companies with a key focus on diversity and inclusion. Malone says Atento hasn’t made any direct investments, however, the team plans to back several companies within the next two to four weeks.
“Many of the companies we are looking at will suffer through this period, however, and we want to be as hands-on as possible to support their capital management efforts and work with other funds to ensure that the rounds we participate in provide companies with adequate capital to last them for 12 to 18 months,” he said.
Malone is also an angel investor and completed his first deal in 2019. He set a goal to back one pre-product company per year and prior to the pandemic, he committed to investing in Ideate, a St. Louis based collegiate focused ed-tech company. Malone says he has no plans to renege.
“The pandemic is definitely creating cause for concern for Ideate as I have seen preliminary projections that college enrollment will be down 7% in the fall,” he said. “Despite this fact, I believe in the founder and the problem that the company is solving for and am confident that there will be widespread adoption when the product comes to market.”
COVID-19, Venture Capital, and the Future of Work
Zeal Capital Partners is a new VC fund partnering with founders led by diverse management teams to bridge the skills and wealth gap in the U.S. Zeal Capital founder and managing partner Nasir Qadree says his team has extended support and guidance to its current pipeline companies since the start of the pandemic.
Zeal Capital is built on “inclusive investing” using a five-prong strategy which includes building a team of diverse fund managers while investing in fintech and future of work categories at companies outside of nontraditional “VC hotbeds” like New York and Boston. The firm anticipates its first close in July.
“We’ve been forced to kind of escalate the importance of this fund given the economic and health environment,” he said. “It’s important that we invest in the right programs or resources that allow the workforce to find a successful way to stay competitive by reskilling and upskilling programs and technology initiatives.”