Fundraising, M&A, and strategic partnerships for startups in the time of coronavirus
Coronavirus has literally brought the global economy to a halt with joblessness on the rise, and startups are in a very vulnerable position. In such an environment, fundraising would seem like a distant dream for startups, but they need to do something more to keep their external stakeholders engaged.
To help startups navigate through this crisis, leading venture capitalists (VCs) have come together with a set of guidelines to address the various business challenges they will have face under the topic: ‘Best practices for founders in the wake of Covid-19’.
The VCs which have provided the note are: Accel, Bessemer Venture Partners, Chiratae Ventures, Kalaari Capital, Lightspeed, Matrix Partners India, Nexus Venture Partners, Omidyar Network India, SAIF Partners, and Sequoia Capital India.
Following below are some of the guidelines.
The VCs have a simple advice on this: Remember fundraising outcomes are not only dependent on your business and its metrics, but also on the macro environment.
All the assumptions surrounding fundraising, which were present before coronavirus struck the world, has gone into a deep freeze as investors are also resetting the entire expectations.
The investors say a “flat round”, which extends the runway of any startup for at least 12 months, is a good outcome in these times. Founders are advised to remain patient if they have any plans to raise funding.
The guideline says, “Do not perceive a slow response time from investors as lack of interest. Many are working through situations with their portfolio companies or in their personal lives. Be responsive and persistent.”
Communication with external stakeholders
In the current situation, it would do a world of good for the founders to communicate with the external stakeholders with open and transparent updates.
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For B2C startups, it would be prudent to provide constant updates to customers while being transparent on any disruption. And in the case of B2B startups, the same follows.
This also calls for startups to provide employees with the right messaging to provide their customers and partners. Once the employees are given messaging, they need to be given directions on the communication channels they need to choose that will make sense for each stakeholder group.
Strategic relationships and M&A
In times like these, mergers, acquisitions, or strategic relationships look very attractive for startups as there is greater focus on collaboration rather than competition.
If the startups are keen on an M&A option, the investors’ advice to them is to shortlist companies that would add value to the customer base, revenue, technology/IP, people, and operational capabilities.
This is also the time for founders to manage the environment very carefully, especially when the sale process is going on, as it has various kinds of stakeholders – employees, investors, customers, etc.
Self-assessment: Startups need to be clear and realistic about how they are going to be perceived by potential acquirers depending on the various circumstances. This is not the time to either undersell or oversell.
Strategic relationships: During an M&A process, there are various factors which come into play like inter-personal relationship between the founders or startups looking at adjacencies for their market reach. M&A could happen due to certain technology requirement or new strategic initiatives. It is also important for startups to take the help of advisors or bankers during an M&A process.
Types of M&As: There are a number of variations in terms of the types of M&A offers a founder can get. These can include equity only, equity plus cash, asset purchase, stock purchase, etc.
There are few other things one needs to consider before the founder goes through the process, which include earn-outs, management carve-out, and the taxation aspect.
The acquirer will typically want to lock you into their company for a certain amount of time, usually ranging between one to three years. They will aim to compensate for this over and above your regular salary/ESOPs by providing an earn-out, which could be cash payments based on the time you stay at their company or on the deliverables you achieve.
The purpose of a management carve out is to incentivise the top leadership, including the founders to stay in the company.
However, the issue of taxation could be tricky, especially when there are international structures or regulations that need to be looked into.
In an uncertain environment where one is not sure how the coronavirus epidemic is going to end, all options are open for startups, which is also an unchartered territory.
Founders have taken the brave step of starting a venture, and it is this same courage which will take them through.
(Edited by Megha Reddy)