Despite assumptions to the contrary, during this Covid period, we are seeing financing for startups (Seed and Series), investments and transactions involving early stage technology companies. Silicon Valley mega investor A16Z reports that the focus of many such financings has been technology in four key areas: collaboration tech, AI, blockchain and full stack.
BTW – as I was working on this – hot off the presses is the news of Stripe buying Nigerian fintech Paystack for a rumored $200+ million. Obviously, Taylor Legal wasn’t on this deal. (I would love to see the Term Sheet.) But this proves that (a) deals are moving forward and (b) that there is faith in African business and the economy.
Covid-Era Buyer’s Market
Prior to the pandemic, technological financings took place at a rapid pace. This created a bit of a seller’s market during 2019 and early 2020. They dropped off at the beginning of the lock-downs, but, contrary to expectations, have rebounded. While financings have become a bit of a buyer’s market – as has happened in previous economic slowdowns – the Sellers of early stage technology have not been hit as hard as previously.
One reason for this is that unlike prior recessions, there is an air of uncertainty to this economic slowdown. The factor contributing to this economic slowdown, Covid-19, is really an external one. It is not fundamental to the business cycle (such as the CDO and mortgage backed security unravelling back in 2007). Buyers and sellers are currently wary – but also hopeful that we will emerge from the pandemic situation in the near future, so there is less of a buyer or seller’s market currently.
Tech Companies Are Waiting
On the seller’s side, startups and other technology companies who have the ability to wait, before raising funds, have, however, probably been content to do so until the economy improves. Many buyers have also been keen to keep their powder dry. Some might see specific strategic fits which may be interesting and worth pursuing. Target technologies and businesses that involve new products, services, technology or some other business that may be in an improved condition based on COVID-19 are still being considered.
5 Things to Consider for Financing for Startups
All this being said, there are still some challenges/considerations that need to be taken into account during the current pandemic:
1. Investors are moving slower. Whether this is a result of slower internal processes, e.g., vetting, due diligence, evaluation and approvals, or just general wariness, those seeking funding should be prepared for a longer process. Take the time to get your financials up to GAAP/IFRS standards, if not already.
2. Due diligence will take longer and be more involved. If physical assets and facilities are involved, either special arrangements will need to be made for such due diligence, or deal documents will, at the request of investors, be amended to buttress the Reps/Warranties and Covenants on the part of the issuers.
3. Investors, under current circumstances, may invest less at lower valuations. Yet they may also insist on rights to invest further, at current valuations, at the end of Covid-19. Then they can conduct proper due diligence and business hypotheses be tested under “normal” conditions.
4. Outside fees and costs may be more expensive for all sides of transactions under current circumstances. Yet travel/entertainment costs will be lower.
5. Finally, as one professional investor informed me recently, exits are now rarer, because of Covid. While there have been marquee IPOs, bigger rounds, such as Series C and beyond, as well as M&A acquisitions have slowed significantly during this period. It’s a good time to be a startup. If you are farther down the growth path, things may be a bit more challenging.
Good Things Come to Those who Innovate
Finally, all parties during this time need to understand that financing structures will be more flexible. Both issuers and investors must be creative in how they allocate valuation and financing risks. Investments will take place – but the terms of those investments may look different than back in October 2019.
Investors/funds/private equity buyers are sitting on a lot of cash today. Many will need to deploy capital at some point in order to satisfy their own partners and investors, especially those with investment periods coming to a close. Many looking for companies with new products and technology will find that the current environment presents strategic investors with great opportunities. More so if they are willing to move quickly and are willing to be creative with their deal structures. Similarly, sellers can also benefit by being flexible, creative and willing to understand that they can emerge stronger in the post pandemic business environment. It’s a unique moment for financing for startups.
Seed Series or early Series A investments in your future? A group of experienced small business lawyers can help you close a round quickly, efficiently and with minimal pain and costs for all parties. Schedule a free consultation with Taylor Legal to discuss how to move forward with a financing.