What To Do When VCs Say They Need to Put Investing On Hold During COVID
By Mark Graffagnini
Some of the questions that we receive from portfolio companies and prospective portfolio companies are:
What do we do when one of our potential venture capital investors tell us that they need to put investing on hold to re-evaluate their existing portfolio? Or what do we do if investors seem like they may be dragging their feet on an investment opportunity?
If you find yourself in this situation it can be problematic; maybe you have a round that was in progress during COVID and you’re trying to fill out the round and the investor who’s maybe reevaluating things is causing a delay which is putting pressure on you. Maybe you were in discussions for prospective financing but did not get a deal close before COVID and you didn’t get a term sheet and you’re wondering if these investors are still going to come on board.
Are you going to invest in my company?
First and foremost I think it’s acceptable generally in the industry today that you just ask the question directly – Are you going to likely invest in this company? There are a number of funds that are out there that will attempt to be polite or coy and just maybe not tell you that they’re not interested. Many other groups just string companies along to keep that optionality.
I think it’s important in any company – VC relationship that the parties are dealing with each other on an honest and open basis, so I don’t think that you necessarily need to hesitate to just simply ask the question. It might be that the person you’re dealing with at the fund isn’t a a significant enough decision maker to answer it. It’s also quite possible that the fund aren’t really sure themselves about what the fund is going to do next in terms of investing in new opportunities versus limiting their investment companies in their current portfolio.
There are a lot of funds out there that are looking for new opportunities and that are continuing to evaluate investments such as ours, so the best thing is to talk to your advisors, the people on your board, your service providers to get a good lay of the land about who’s investing and who’s not investing. If you’re not sure of those answers, then you need to work on getting that expertise into place sooner rather than later.
Start evaluating a bridge round
The second thing that I would generally recommend is to start evaluating a bridge round with your current investors through a convertible note, SAFE notes, etc. An opportunity between rounds is really the best time perhaps to do one of those types of vehicles because it gives people who are supporters of the company a slightly sweeter deal than the investors that are going to come in and complete the later round. You may be in a position where cash is getting low, but it’s not an optimal time to raise the next round, so these are the times that you might really want to think about bridge rounds. The people who are likely to invest in bridge rounds are often existing investors who already have a financial interest in the company. You don’t have to do a mega round in this bridge or convertible note round to get to the next one, you just need to do enough for the next round of financing. I would budget a minimum of three to six months to get a deal closed. Even when people are generally familiar with your company, by the time groups do both their business due diligence, legal due diligence, and get all of the legal paperwork in order, move funds around, get things ready, a lot of time can pass. In this environment of uncertainty, it might even take more time to raise capital than it did recently in the past.
Get familiar with alternative options
The third is to make sure that you or the people that you’re working with are really familiar with the actual alternatives to institutional venture capital. In scenarios like this and previous recessions, you might find a number of venture capital funds that double down only on current portfolio companies. Many groups don’t take a whole lot of new opportunities on for new investments. You’re also going to find that funding from Silicon Valley groups that were open to fund companies outside of traditional innovation centers may now be closed for consideration. What can occur is that the competition for the very best deals increases dramatically on the coast in times like this and companies that are in the rest of the country need to keep their eyes and ears open for all kinds of sources of capital.
Hopefully you’re working with groups that are familiar with sources of capital and know where to find them to help you syndicate a round effectively if you’re not in the round.
Do not delay your objectives for a specific VC that is dragging their feet
Finally if you find yourself in the midst of a deal and a venture firm tentatively backed out by telling you they they’re going to come in at a later time, it’s probably a good idea to just go ahead without them and revise documents so that it’s clear that you’re able to proceed and fund that round with any other venture capital groups that might be available rather than wait for a specific group to materialize.
Those are probably the best pieces of advice I can give to companies that find themselves a little bit of a tricky situation where funding is a little bit slower or people have backed out. Make sure you take a look at your documents to see if you’re subject any no shops or other restrictions on your ability to talk to other investors and if you’re not, it’s probably a good idea just to start those conversations sooner rather than later unless you’re being expressly told that this just a formality and it’s going to happen any day now, but even then it’s probably best to have your best and take a look around. I hope this helps, I hope that you guys stay safe out there and that your businesses are doing well despite all the uncertainty and let us know if we can help!