This continues the advice from top blockchain investors in Europe. In part two, we asked for advice for startups who have already received funding.
Last week we spoke with six of the top blockchain investors in Europe to get their advice on fundraising in 2020. For part two of this post, we asked a couple of follow up questions, as well as receiving feedback from another two venture funds. This second article focuses on how startups who have completed their fundraising should behave in this market, and if there are any regional differences right now when it comes to fundraising.
With the major paradigm shift that 2020 has brought, this post provides some great insights and fresh perspectives from across our European investor network. Part two delivers a wider array of insights to really help your planning and navigation of these times.
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Venture investors are playing the long game, so if you have traction already and keep growing in this environment, you should not have too much trouble raising again. It is true that the numbers might take a small hit due to the situation and you might take slightly longer to reach your targets. Ideally, you’ll have enough runway to last until Q4–2020, Q1–2021 — if not, start planning with your investors — a small bridge discounted on your next bigger round might be enough to last until the situation improves globally.
Meanwhile, make the most of it:
We are seeing little difference between European and US investors — the best investors are still open for business, and are even more eager to deploy capital in the face of this new challenge.
Funded startups need to be antifragile. On the one hand, it’s a cash management problem to solve, therefore cut fixed and variable costs which are the least detrimental to the business. The v-curve is not going to happen overnight (we will rather see W-curve) so plan for the next quarters to come. Then, we see many startups continuing to produce content, grow their community, and present their product via demo/mockups. I think that’s the strict minimum.
Cash is king. In the current environment, cash is king. Get an overview of your costs and runway today. If necessary, take immediate action and reduce cash burn to conserve funds. Bear in mind that cash is like oxygen — you hardly notice it until you’re running low. Nobody knows how this plays out, so go through all conceivable downside scenarios asap, using realistic stress assumptions. Come up with back-up or emergency plans, especially with a view to preserving liquidity (cost-saving measures, generating or front-loading revenues via discounts or special offers). Keep an eye on the runway.
Maintain revenue generation. Crypto is volatile, so are revenues. For many people, the financial situation has changed overnight, which inevitably has implications for blockchain and crypto startups too. The current risk-off mode might entail a change in recurring revenues (e.g. consumers buy less crypto through fiat on-ramps and exit trading in a down market). Be swift to react to the scenario and anticipate market trends. For instance, DeFi apps or crypto lending platforms are offering attractive rates in the current low-rate environment. If your company has sufficient liquidity, try out new business models to speed up adoption and revenue generation at a later stage thanks to lower customer acquisition costs (e.g. “freemium”).
Assume lower valuations. In light of the uncertainty and the more challenging backdrop in financial markets, funding conditions are likely to become less favorable. In this context, previous backers are more important than ever, in part because VCs often cut back on investing and re-focus on existing portfolio companies instead. It is therefore critical to remain in close contact with your network and other investors, even if it’s just for the sake of getting an overview of what’s going on. Looking ahead, assume lower valuations and smaller rounds for some time.
Talk to the team. Make sure everyone is well-off, particularly during times of isolation and working from home. Help your team members and staff — they will be grateful in the future. Many things are up in the air in the current situation. Give regular updates and communicate clearly — don’t keep your team guessing. The current environment might also be an opportunity to look for key hires or fill vacant positions more quickly.
Keep an eye on state aid. Closely watch public support programs to ensure startup survival launched by governments across the EU (e.g. EIF, KfW in Germany, local governments), and check if you’re eligible. In countries like Germany, you might qualify for state aid in the form of short-time work schemes like “Kurzarbeit”, an initiative first used during the financial crisis of 2008. This allows employees to work shorter hours while receiving up to 67% of their base salary to keep their jobs.
Simple, try to budget towards an 18-month runway, and use the time targeted towards customers. I am hearing via various teams that actually now, potential customers have time on their hands to discuss, pick up the phone and get informed — use it ;).
We are investing on a global playing field. Hearing our friends, funds and companies around us, we do not have the impression it is significantly better in either region in terms of fundraising and capital available. In absolute terms, Asia and the US are obviously very different, as both sides are less risk-averse, and as such, more early-stage capital is deployed in general.
I think one obvious difference is that Asia (China specifically) is already used to online conferences, fireside chat or panel format. Of course, it influences offline events, but every day there are already a lot more online events. Startups in the same field seem to have more conversations with each other. I hope I can see more similar things happening in Europe.
There are always regional differences in funding in technology, and in crypto more specifically. Europe has traditionally been more conservative and has fewer funds deploying less money into the blockchain market than the U.S or China. That said, there will always be money available for high-growth companies. It might be harder to access and take longer to close, but companies that are solving a huge problem for lots of people and have proof of that, will get funded. I wouldn’t suggest looking at any particular region for investors, focus simply on getting money in the door from good investors as quickly as possible without selling too much of the company.
The major fundraising trend to come out of this health crisis and subsequent recession will be a focus on profitability and stable growth. There will still be a role for growth capital, but entrepreneurs should go back to basics and think about profitability ahead of growth.
This is a time to re-examine your current business plan. Rather than planning for 18 months, look at how you can stretch your runway to last 24 or even 36 months. Another option we are seeing some startups exercise right now is a seed extension round, allowing them to comfortably extend their runway.
Some other big areas to consider are:
A big thank you to all of the eight funds who contributed to part two of this post. We hope you found these recommendations insightful and applicable.
If you missed it, part one of this article addressed how projects should address getting funds in the current market, and can be found here.
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