- Startup investors hit the pause button briefly earlier this year; but deal activity quickly went back to pre-pandemic levels
- Changes in crowdfunding regulations make the category newly viable for discerning entrepreneurs
- Sectors like health-tech and ed-tech have become especially attractive as the pandemic created new opportunities
SVB brings together VCs, founders and others at TechCrunch Disrupt to make sense of a surprisingly resilient startup investment marketThe pandemic is far from over and its long-term impact on the economy remains uncertain. But startup investors looking ahead are seeing nothing but opportunity.
“There's no shortage of deal flow,” said Angela Tran, general partner of Version One Ventures. Tran spoke during one of three sessions sponsored by Silicon Valley Bank on topics related to fundraising at TechCrunch Disrupt last month. “It's as noisy as ever, capital is as abundant as ever,” Tran said. “So for us, the challenge is really finding what are the right investments to make in this time?”
This is undeniably good news for founders, especially those who take the time to understand subtle shifts in the investment landscape in the current environment. The three conference sessions helped to pull back the curtain on those shifts, highlighting the trends that are shaping investors’ views.
As always, the types of funding available to founders are broad and also more viable than ever, the speakers said. What’s more, some business sectors are especially hot at this time. Digital health, communications and ed tech, for example, have become increasingly relevant because of the pandemic.
Here are some of the trends shaping startup investing and some insights on how to fundraise successfully.
Choosing from an abundance of funding sources
In February, SVB’s Startup Outlook found that there was “no shortage of investors” and a plethora of successful fundraising efforts, but noted that many entrepreneurs were finding fundraising harder in 2019 and the early months of 2020, as investors had grown increasingly selective. Investors now say the pandemic has not tempered their enthusiasm for startups.
The panelists at TechCrunch Disrupt were bullish on a diverse set of funding sources that included angel, venture, venture debt and even crowdfunding. And some encouraged entrepreneurs to take advantage of that diversity.
“You want to have a nice combination, if you can get it, of different sources of capital,” said serial entrepreneur and investor Phil Libin, who founded Evernote and is now CEO of Mmhmm App. “Way too many startups only think about equity investment as a source of capital.”
Fears that the pandemic would put a chill on new entrants in the startup investment market have proved unfounded so far.
“We thought angels were going to be the first to go away as some of their personal net worth took a hit,” said Andrew Oddo, Director with SVB Startup Banking. “But there are so many new angels that have come into the fold this year.”
“I’m actually shocked by how much angel activity there is,” said Tran.
Indeed, Silicon Valley Bank data showed that angel investing had increased as a percentage of deals this year. Oddo suggested the growth may be due to longtime operators and founders finally seeing successful IPOs and exits, leading to them to now jump into the ranks of angel investors. Tran argued that the boom in shares of public tech companies may also be filling investors’ coffers. Early stage deals, however, showed a drop in angel investment, according to data Oddo shared, compared to investments in later stages.
Crowdfunding coming into its own
Perhaps because of its deal-size limitations, crowdfunding has been dismissed by many founders. Until 2020, companies were allowed to raise just over $1 million from equity crowdfunding per year. Soon, companies will be able to raise $5 million each year. That may be a game-changer for some, as Dawn Dickson, PopCom CEO, suggested in her talk at TechCrunch Disrupt.
Dickson has raised $3.3 million to date from both traditional venture capital and equity crowdfunding. A full $2.3 million of that total came from two crowdfunding rounds. The first closed in 75 days and the second in 47. In 2019, Dickson became the first female founder to raise more than $1 million in crowdfunding using secure token offering — digital versions of financial securities.
“I really decided to go the crowdfunding route because I wanted to open up my business to my friends and family and be able to really solicit my investment broadly,” she said. “When you're raising money from VCs, you're not permitted to go online or social media to talk about your offering. It's against SEC rules.” But entrepreneurs may do so during their crowdfunding campaigns.
Crowdfunding is a good option for founders who are keen to augment their network with more public ways of reaching potential investors. It can also give entrepreneurs more control over growth plans, and it allows them to set different terms of investment, from equity to revenue share. But crowdfunding platforms can take 4-8% of a total offering for their services, which include performing due diligence on their clients, and, Dickson noted, some venture capitalists are put off by companies that have raised money this way.
Dickson warned that crowdfunding is no easier than venture capital, just different. “It is very time-consuming,” she said. “A lot of conversation, a lot of engagement, answering questions and being very available for your investors. And a lot of it involves much education, for investors to understand crowdfunding as an instrument and for them to understand your company in the process.”
With investments as small as $100 and as large as $4,999, it took 4800 investors to fill both PopCom rounds. That’s now a group that she must manage. While they all sit on the cap table in one “crowdfunding” line, they are individuals that she keeps up to date monthly, and has invited to a virtual investor event, which saw 900 show up.
What investors are watching
Across the board, certain sectors are drawing more investment interest than others, according to Tran and Oddo. Many of them are tied to markets that have emerged as more important during the pandemic, such as digital health, education technologies, life sciences and work-related tech. “Certainly anything remote-tech related, B2B and enterprise SaaS has really done quite well” among investors, said Oddo.
These categories are well-positioned to attract capital, the panelists agreed, provided they adapt to economic conditions as the rest of the year unfolds.
“If you're an investor like me, you're looking for businesses that have thrived during COVID, that you can imagine will sustain this momentum, even as we get control of this virus,” said Tran. “Not a fad business. So, you know, for me, finishing the year strong really means staying disciplined.”