Raising capital amid the Covid-19 crisis

A reality check for early stage businesses currently seeking VC investment

This is a deeply worrying time for founders of early stage businesses. In the face of Covid-19 the funding market is going through a hard reset. As a result, companies looking to undertake financing rounds in the coming months are under intense pressure. Some great new businesses will fail if they can’t find a path to capital soon.

To make matters worse, founders trying to navigate this maze are having to decipher conflicting messages. Incumbent investors are telling them to dramatically reduce their expectations of pulling in new investors for the foreseeable future. The message is that VCs are going to be preoccupied with their own portfolios for a while.

Yet, at the same time, some of these very same VCs are actively promoting their funds to new companies, claiming they are ‘open for business’. Open-source lists with hundreds of ‘active’ VCs are being published online. Some of these investors, particularly those that have launched major new funds in recent months, are out there with genuine intent. But there are many that aren’t and only have false hope to offer.

This is all very confusing for founders.

A certain amount of hedging by investors is to be expected. Until VCs can get a strong fix on the needs of their current portfolios and some sighting of a Corona exit plan, most will simply step back from the table. However, good deal flow is the lifeblood of any fund manager, so they have to be seen to be ‘in the market’ even if they are still just taking stock.

The reality is that for the hundreds of VCs claiming to be ‘open for business’, there are probably less than 20 across Europe that are truly still in the game — at least for now. These are the top tier funds that have enormous fire power and can ride out almost any storm. More than that they have the dry powder to see a big downturn as an opportunity.

Sooner or later though the brakes will get eased off. Investor confidence will gradually return, and capital will slowly start to flow again. We are already seeing this happen in China. According to Pitchbook, Chinese firms recorded 66 venture capital deals for the week…