START-UP CHALLENGE. Venture capital funds must also adapt to an unprecedented context, after several years of breaking investment records in a very aggressive market. Start-ups need to re-learn how to attract these investors who are crucial to their growth.
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In February 2020, a report by PwC and CB Insights showed that venture capital financing increased in Canada for the third consecutive year. The companies raised US $ 4.1 billion (or C $ 5.8 billion) in 2019. Most of those 469 deals benefited seed and early stage companies. All lights therefore remained green for 2020. Until COVID-19 turned them red.
It is difficult to determine the impact of the pandemic on the funding of start-ups. “It seems that in the short term, many venture capital funds will remain cautious, time to better read the new market, but it will present a challenge for start-ups, many of which require fast liquidity ”, advances Me Scott Rozansky, partner and head of the Montreal venture capital practice group in Dentons.
More pressure on profitability
A Startup Genome report published in May indicates that worldwide, four in ten start-ups don’t have enough money to survive for more than three months. Of those already hoping for a round of Series A financing, 34% will not pass the six-month mark without an additional injection of funds. Start-ups find themselves between two fires: declining demand that drains their profits and backers less inclined to invest.
Another challenge for them, some investors may be more demanding in terms of the rate at which they spend their money, the time in the market and the generation of income or even the achievement of profitability. “Usually, profitability is not a concern for venture capital funds in the beginning, they are more interested in development, marketing, coming to market and first sale, Mr. Rozansky underlined. But there, there may be of more pressure to at least show a very clear route to profitability. ”
The pandemic also has the effect of encouraging funds to worry first about the companies they already hold in their portfolios, before looking for new projects. That’s the strategy taken by Real Ventures, which in 2019 was the second most active investor in Canada, behind BDC. The fund has focused its efforts since the crisis began on helping companies in its portfolios pivot their business models, adjust their costs or prices, and so on.
“We’re not immediately looking for new start-ups to fund, we keep our powder dry, because we know that great projects will also come later,” said managing partner Janet Bannister. He said that, the pandemic has generated growth for some companies, especially in areas such as telemedicine and online education. Start-ups have received new money from their current investors and some have even attracted new ones.
He admitted, however, that the pandemic had created a huge economic shock wave. “Others will look at funds at start-ups and wonder if their business model has potential in a post-COVID world, which will never go back to normal,” he said. The fundamentals, the value proposition, the ability to get to market relatively quickly will be even more important.
wait the right moment
Andrew Popliger, assurance, technology, information, communications and entertainment partner at PwC, warns that start-ups may also wait before applying for new funding. “The time is not right for some of them to proceed with a round of financing,” he said. The proposed agreements may be less attractive due to the loss of business value. Therefore, young shoots will prefer to focus on developing a more vibrant business model.
“With money for good projects, Mr. Popliger added, changes are the definition of a good project.” The sectors that were most resilient or even benefited from the pandemic became more attractive than others. Moreover, due to the difficulty of arranging face-to-face meetings, creating a relationship of trust with future investors will also be more complicated.
“But you always see new companies emerging from any crisis and this one is no different,” Popliger concludes.