How Covid-19 Is Changing The World Of Venture Capital Investment
FREDERICTON – Covid-19 has derailed a lot of business plans for 2020, and for a lot of startups in the region, that meant putting a pause of raising venture capital. But some say the crisis may change the way companies raise money going forward.
Fredericton startup Black Arcs was getting ready to start a $2-million seed round when the crisis took hold. The company has created software that uses data to give a professional analysis in a way that’s both informative and entertaining. It lets users visualize possibilities and test-drive how decisions shape outcomes.
The goal of the seed round was to help accelerate the company’s expansion into the United States market.
“We were really focused on our U.S. entry because right now, all projects are within New Brunswick and that outside validation really helps raise capital, so that plan went sideways for a bit,” says Jake Arsenault, Black Arc’s founder and CEO.
“It’s hard to support a new product virtually while you’re stuck in New Brunswick too,” adds the company’s director of operations, Luke Robertson.
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Black Arc’s situation isn’t unique. New Brunswick Innovation Foundation (NBIF) CEO Jeff White says the Covid-19 crisis forced both startups and their customers to hit “pause” on a lot of their plans.
“The pause was on both sides. Companies had to look at what the impact was going to be to their company. They got focused like everyone else. Safety became number one. Everyone focused internally. What do I do with my staff? How do I set them up?” says White.
“Then they started to look at their customers and all the customers did the same thing. So I think some witnessed some of this pause in revenue and ‘got to look after our own’ thing. As a result, there wasn’t as much active outside fundraising happening.”
While many startups in the pre-revenue and early revenue stages faired alright, White says those that were in the middle of scaling had big decisions to make.
“If you were scaling, looking at $1-million, $2-million and higher a year, you had to assess the impact of this really aggressively because you’re scaling your business to match that growth rate of your revenue and so your spend rate might have been going up at the same pace your revenue was projected to go up,” says White.
“Then revenues stopped immediately, but you can’t stop spending immediately. You had to assess how big of an impact you have to make to your burn rate in order to change match your changing revenue growth rate.”
But as economies across the United States and Canada start opening up, White says investing has started to do so too, including at NBIF.
“We typically would have had more money out by now, but it’s just gotten pushed out, so I think we’re going to see a bunch of it come out over the next three to four weeks,” he says. “We’re approving transactions, we’re assessing transactions, we’re doing all those things, but there was a bit of a pause putting it all together.”
Relationship-building during Covid-19
A major part of courting venture capital is relationship building, both formally and informally. Traditionally, these investor relationships are formed in a board room. This is particularly true for New Brunswick and Atlantic Canadian startups, who often need to travel to meet with potential investors outside the region.
But with the American border still closed to non-essential travel and inter-provincial travel restrictions between provinces, White says some investors are becoming open to building those trusting relationships in other ways.
“Our team is in the middle of diligence for one of our companies and the new investor’s requirement is a physical visit. They’re like, ‘well, we’re not going to be able to do a physical visit for six months, but it’s a great business opportunity.’ So the investors themselves are adapting their policies and principles to deal with that,” says White.
“More extensive interviews. Someone walking around with a live video camera. So we’re seeing some adaptations in the investment community as well,” he says.
Investors are looking for good transactions and they’re not going to want to just wait until things go back to normal, whatever that normal is going to be. Even when it does, who wants to get on a plane? Let’s be real.”
With everything from live music events to conferences moving online, White is hopeful thinks it can be that way for investing too.
“Industry conferences are moving online. Venture meetups are moving to a virtual world. Necessity forces people to get comfortable it,” he says. “So I’m hopeful it sustains itself.”
Black Arcs was in a unique position since it had a strong local customer base, one of them being government. Because of this, Robertson says the company has faired pretty well through the pandemic.
“We had a plan and it’s a little off track but we were able to keep moving forward with what we’re doing and we’ll continue to raise, but it may just take a little longer. It slows down our scaling plans but we’re fortunate that our clients are pretty resilient,” he says.
“Government is one of the best clients to have right now and a lot of other private companies are having a difficult time with suppliers and vendors being a little bit more conservative and usual.”
But while making investment deals virtually may work from some tech startups, Arsenault says it may not work for Black Arcs because its product is highly visual. Thankfully, the company has people down in the U.S, who are able to meet those investors when needed.
“I think that could work for ventures that fit the mold, but I think that we’re pretty unique so we have a different take on it,” he says. “Our offering is really distinct and we don’t really fit the metrics and the structure that a lot of investors think about, like software companies. We really need to be in front of people and give a demo and tell a story, then it clicks.”
Though seeking investment virtually may not work for every startup, on the whole, White is optimistic that Covid-19 will change how many investments are made. He says creating and sustaining relationships virtually are also important.
“If you think about, in some venture capital investments, there’s a physical visit at the beginning of the investment and the diligence process, then maybe once a year. But most of the relationship-building happens through email, phone calls, Skype calls,” he says.
“All those things were in place, it was just at the beginning can you get comfortable enough without sitting across the table from someone.”
If anything, he hopes it will at least change the way some investors approach their diligence process and other ways the company and investor can build those ‘informal’ relationships formed during in-person meetings.
“I hope it changes some of the diligence processes because the technology we’re using today didn’t get invented because of Covid-19. It was in place, but we have accelerated the use of it and the adoption of it into operating practice,” says White.
“We all know in-person meetings have a lot of informal communication that goes on and informal relationship building, so that’s the part we got to think hard about. How do we make that happen?”