How Startups Can Pivot Their Approach With Early Stage Financing

Company formations capitalize on innovation, time and talent during downturn

While it may seem counterintuitive or surprising to some, historically we’ve seen that economic downturns can be a good time to start a business. Many successful entrepreneurs know this and see several opportunities during a decline:

• This is a good time to innovate and seize the opportunity to address changing market needs;
• Startups can fill the gaps that bigger companies may not be able to serve;
• New companies may now have a larger talent pool given the number of people under or unemployed.

In fact, several successful household names started in a downturn – Netflix, Airbnb, Trader Joe’s, Venmo, MailChimp and Slack, to name a few.

Activity on both ends of the business lifecycle

While the COVID-19 pandemic has significantly impacted businesses and the economy, much of the slowdown occurred in March and April when investors’ focus was largely on stabilizing their portfolio companies. Since May, venture capital (VC) investing has picked up, eager investors are seeking out new opportunities and early-stage valuations have largely been resilient, according to the National Venture Capital Association.

According to the Brookings Institute, new business formations fell off in the spring, but are on track to outpace recent years. The data shows that cumulative business formations have rebounded and there were actually 56 percent more new business applications by mid-August 2020 than in mid-August 2019.

A disproportionate impact for women, BIPOC

With many VCs choosing to stick with their existing networks and experienced founders during the downturn, women and Black, Indigenous, and People of Color (BIPOC) have been disproportionately impacted.

For example, while overall U.S. venture capital investments in 2020 are on par with previous years, venture funding for female founders in the third quarter hit its lowest quarterly total in three years, according to Pitchbook. Even in the best of times, women and BIPOC communities face numerous unique hurdles when raising capital, and the pandemic has only exacerbated those challenges.

Our team represents companies in a number of different industries and growth phases, and we specialize in working with clients from “cradle to grave” – meaning formation through the business lifecycle to an exit. In our corporate practice, we’re seeing significant activity on both ends of the business lifecycle, both very early-stage financing and ready for exit. As new companies are formed, many founders and entrepreneurs are trying to raise very early-stage funds.

Early-stage financings: Pivoting away from pounding the pavement (for now)

While COVID hasn’t changed much about how companies are formed, it has changed how they are financed. Founders and entrepreneurs who are trying to raise early-stage funds have had to adjust to the “new normal” in doing business today. The process of raising money has changed significantly – not with respect to deal terms – but rather in the process of raising a round remotely.

Stay-at-home orders, social distancing and limited travel mean that the old way of doing business is on hold. Without being able to take the traditional route of flying to California to have coffee, or meet face-to-face and pound the pavement, founders are relying on Zoom, video conferencing and the phone.

With these trends and circumstances in mind, below are three tips for founders seeking early stage financing based on what we’ve seen in our corporate practice:

1. Think local and consider existing relationships. With fewer startup events and networking opportunities and limited travel, some early-stage companies are having more success closer to home. Don’t overlook local opportunities and existing relationships. For women and BIPOC communities, efforts to fill gaps are beginning to emerge.  Energize Colorado Gap Fund and Valence Funding Network are a couple of examples.

2. Make the most of digital tools. It’s safe to say that video conferencing is the new normal for business in 2020. NVCA expects that “investors will likely become more comfortable with not meeting founders in person should the pandemic continue to inhibit networking events.” Startups can put their best foot forward by ensuring their pitch is as digital friendly as possible. This includes ensuring you and your environment are “camera ready” when it’s pitch time, having great supporting visuals, walking through online demos (when applicable), and providing materials pre-or post-meeting in a user-friendly PDF or web page.

3. Consider other funding sources. We’re seeing less activity with professional angel investors and, aside from top-tier VC firms, we’re seeing fewer traditional Series A and Series B venture capital deals. Outside of true family and friends rounds, founders may need to consider alternative funding sources. New types of financing structures were emerging pre-pandemic and we expect to see them continue to gain popularity with founders in the current climate.

INTRO is an example of a tool that can help identify funding options based on a company’s size, industry and other variables. Included in these types of alternative funding is KO client Bigfoot Capital which provides growth-oriented loans (term loans and revenue-based financing) to B2B SaaS companies with initial revenue scale ($1M+ annual revenue). “Having funded 25 SaaS businesses, we’ve been very encouraged by the ability of companies in our portfolio to meaningfully grow with our capital while preserving equity and maintaining optionality for future capital formations and exit opportunities. Our thesis has proven out, and we’re excited to  fund the next wave of sustainably built SaaS businesses,” says Bigfoot founder and managing partner Brian Parks.

Today we’re also seeing an increase in funding rounds through strategic investors. This means startup companies are taking investments from other companies in their industry. For bigger companies, these startups may have an attractive tech solution, or they may be a potential future acquisition target.

Early-stage financing in the new normal

While the networking and financing processes have changed recently, especially for early-stage companies, we work with many startups and businesses that are successfully closing funding rounds by getting creative and looking at opportunities that best fit the industry, stage and space they operate in. We realize that one size doesn’t fit all for early-stage companies, especially today, so we rely on our expertise and network as experienced startup and corporate counsel to figure out how to successfully close financings.

Kevin Gibson is a corporate partner at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO Law Firm), an innovative corporate and commercial law firm with a team of experienced lawyers and a practical, efficient, business-focused approach. Founded in 2003 on the philosophy that a different approach delivers better value, our business-first legal and industry expertise helps established brands and emerging companies achieve meaningful business outcomes. KO is headquartered in Denver and Boulder, Colo., and serves the software and SaaS, retail and manufacturing, professional services, energy, food, beverage and consumer goods, eCommerce and internet, healthcare and life science and ancillary cannabis industries. Reach Kevin at [email protected]