Capital Raising from Venture Capitalists during the Pandemic
By Salum Awadh ~ CEO of SSC Capital on 03 May 2020Finance
Start-ups and growth companies are always in need of capital to fuel their growth, expand into new markets, grow their team, and tap new opportunities. But with Covid-19 in the kicking, the predictable story will not be the same, there is a new normal almost in every sector of the economy, and the Venture Capital (VC) industry is not an exception.
The global economy is already in recession mood, with global trade expected to decline by 34% by end of the year, global airlines are expected to incur more than USD 130bn losses, and Africa is set to enter into an economic recession, for the first time since the last 25 years.
Businesses in hospitality industry in Tanzania have already suffered more than 95% of revenue losses, and other industries such as logistics, retail, real estate, and banking are in the same pot.
All these catastrophic developments have had impact on the VC industry as well, and will definitely affect the capital-raising scene in some scores. However, despite the great performance in Q1-2020 where we have seen VC fundraising in Africa surpassing the same period in the previous year by raising USD 283m from USD 253m, we eagerly wait to see the numbers of Q2-2020 to give the better picture of where the industry is heading.
As some VCs have decided not invest in new businesses and rather focus on their portfolio companies (companies they have invested in already), others are still up to the challenge of keeping their doors open and eager to continue investing.
Some of these VCs were already experiencing dry-powder (funds that have been raised and are yet to be invested) situation before Covid-19, and they are now in a tight position to deploy the capital the raised before Covid-19, but VCs will not source and make deals the same way as they did before, and this is important for start-ups and growth companies to understand.
So what changes should be expected?
Scope of due diligence
VCs will change the way they asses companies and their potential risk exposures, beside the traditional scope of due diligence that will be maintained, VCs will also want to see if the company is resilient to future shocks such as Covid-19, and whether they have business continuity strategies when push comes to the shove.
VCs are usually not very flexible when it comes to changing their sectoral focus after starting investing, the investment strategy is usually decided when the fund is launched with little rooms to change, but for VCs that are sector agnostic, they will have the opportunity to twist their focus to businesses that have proven to be more resilient during corona, and the business models that will remain scalable even after the pandemic. These include health-tech, edu-tech, agri-tech and other digital business models that we have seen getting more traction and quick growth during the pandemic.
One of the critical elements of capital raising is usually how companies are valued, and how much VCs are willing to pay. During the pandemic, we have seen many valuation prices going down including the prices in the public markets, and that can affect businesses that want to come to the market now and raise money, as they will face tougher negotiations with VCs
Some VCs have also come to the rescue of supporting start-ups that have previously raised money to remain afloat, by extending short-term, interest-free loans in order for these businesses to continue keeping the lights on. Some may opt to use convertible notes, which have an option of converting into equity in a future date.
Nevertheless, for start-ups and other growth companies that are in the mid-fundraise, they may have to face the new normal as they move to the further stages of due diligence and deal negotiation.
For others who were not in the mid of fundraise, and struggling with liquidity, they may need to look at their capital raising plans more strategically, and probably focus on their survival or come up with a more Covid-relevant business model.
Otherwise, stay home, keep safe.
By Salum Awadh ~ CEO of SSC Capital