Financing in the time of COVID-1917.4.2020
Many start-up entrepreneurs must be wondering about the effects of the international Corona crisis on the financial market. Business Tampere gathered some comments from investors together for this article.
Customer account manager and financing expert for Business Tampere, Tapio Siik, states that there is always demand for good and current ideas, but a certain amount of caution may be in the air. The most important thing is to focus on the basics and to keep your funds in order. Read the article and check out the video links at the end of this article to panel discussion with Butterfly VC, Inventure, Maki VC, Superhero Capital, FiBAN and Tesi about the topic.
According to Siik, things have so far progressed calmly, and previous investment strategies are largely intact. The main outlines remain the same and angel or fund investors have not shown signs of any sharp turns.
”A more cautious approach, however, is evident in operations”, Siik adds.
”People are more careful about the kinds of financing solutions they participate in. Yet, the basic way of doing things still runs its familiar course.”
Siik reminds us that there is no single perspective on the global situation, but the best solutions must always be considered on a case-by-case basis. ”Each fund and investor is unique and functions in their own fashion. So, there is no single hammer to use with all the nails”, he says. ”I don’t see anyone panicking, but naturally one must also consider the risks should this situation continue for a long time. In a worst-case scenario, reserves will be affected and result in write-downs and closed funds. However, we are not seeing any signs of this yet.”
Juho Risku from Butterfly Ventures Oy, a company from Oulu that specialises in developing early-stage start-up companies and in managing funds that invest in these, sees the situation much in the same way as Siik does.
”All the basic elements are still where they used to be. Of course, the following months will provide a closer look at how the market is developing”, tells Risku. ”If the slump is big and long, then it’s likely we will avoid business fields that are more dependent on consumer demand.”
Similarly, Tuomas Kosonen from Inventure Oy that invests in early-stage technology companies, sees no radical twists in the current circumstances, but realises that the changed operational methods and models must be considered.
”We will continue to build and support companies that make it through the different cycles. We work closely with our existing portfolio and support the companies in changing situations, says Tuomas Kosonen from Inventure”
Cautiousness is showing, but the market can also be tempting
When it comes to investing in new businesses, Tapio Siik says that many companies are clearly more cautious than before. The main focus is on their own portfolio companies to which they have already committed. Siik adds, however, that in case an interesting target appears, people will make investments also during a pandemic.
”If a fund has sufficient investment capabilities, the current market may even be enticing regarding certain business areas as valuations are low”, Siik remarks.
”So basically, everything works normally, but handling times may be longer, and decision-making may be more cautious.” According to Tuomas Kosonen, the Corona crisis has not impacted Inventure’s investing in a negative way. ”We have made one new investment already during the first quarter, and we’re looking to make one or two more before summer”, says Kosonen.
Superhero Capital’s Juha Ruohonen also confirms that new investments are being made. Yet he is quick to point out that the bar is naturally set quite high.
The world after the Corona crisis
Tapio Siik believes that after the exceptional circumstances cease to exist, the world will not be quite the same again. Comparisons have been made to the bursting of the Internet bubble in 2000 or the 2008 financing crisis - both of which left a clear mark on operational models. Siik says that similar symptoms or signs are visible this time too. Yet there are many kinds of predictions in the world of financing regarding the situation becoming normal.
”Increasingly, the message seems to be that this won’t be over until after the summer”, Siik sums things up.
”The minimum estimate is four months if things don’t suddenly get any worse. There has also been talk of nine months or even a year, but naturally the scale of the crash dictates the rate at which the effects can be normalised. Optimistically speaking, the curve might start turning already in the summer, but it will take at least a month or two before any real effects can be seen.”
Investment companies are also readying themselves for the eventuality that the market starts bouncing back later this year.
”Current estimates of the duration of the crisis vary between six and eighteen months. Right now, we are planning ahead based on the market starting to recover in the final quarter of 2020”, says Juho Risku of Butterfly Ventures. Inventure’s Tuomas Kosonen believes that things will start cooling down in the summer and the second half of the year will see rapid recovery and increased activities on every front.
Tapio Siik thinks there is no doubt that the crisis will alter companies’ investment strategies in certain ways. More concrete business models and products will be sought after.
”I don’t think getting financing will be easy for man-with-a-slideset companies like it was in the IT bubble era”, Siik states. Technical, business-related, and other risks will be minimised. This is sure to have an impact on which areas investments will focus.
”Start-ups who can offer something in the way of solving or functioning in a crisis like the one we’re now experiencing will be interesting targets. Instant and remote diagnostics, mass testing, and similar solutions are something people will surely be lining up to invest in. On the other hand, ideas with a smaller social impact may be overlooked as people are waking up to notions of responsibility more than before.”
Siik is not sure, however, how far-reaching the changes on value sets, evoked by the pandemic, will be. He stresses that many stopgap measures are ones that should not be taken outside crisis situations. In financial issues, their background role can be strengthened, but as the situation normalises things will finally progress on commercial terms.
Risku and Ruohonen agree on the fact that valuations will see a decrease, but the effects and changes will not be permanent, at least not on a larger scale. The exceptional circumstances force the start-up companies to get back to basics. Companies that have been inflated with investment money will also be a thing of the past. Tuomas Kosonen adds that the so-called FOMO (Fear of Missing Out) investments will be forgotten and even the more tempting projects will be treated with more caution, resulting in collecting the required funds taking longer.
Focus on the basics
All the experts see eye to eye on one thing: a start-up company must have their cashflow in order under exceptional situations. Tapio Siik encourages minimising all expenses that are not essential to maintaining operations. He also reminds that holding on to your customers - who use your company's products and pay for its services - is crucial.
It is not a good idea to start a financing round before the situation seems to be returning to normal. Siik remarks that people are constantly looking for new investments, and there is a lot you can do to pave the way and engage in advance marketing. It might be a good idea to wait until the summer is over, however, if you can. He says that now’s the time to focus on the basics and ensure that your reserves can carry you over the roughest times.
If you are already undergoing a financing round, Siik’s advice is to wrap things up as quickly as possible.
”Now’s the time to cash in quickly if that’s an option”, he says.
”Your company can carry out a round that's smaller than previously intended but one that can carry you over to the next autumn. After the summer is over, you can continue looking for financing.”
Juho Risku also remarks that in this market situation, having sufficient funds outweighs valuation. In addition, Tuomas Kosonen urges companies to concentrate on financiers that they have already talked with before the crisis started.
”It’s always much more challenging to build new relationships over remote connections”, he reminds.
Tapio Siik conlcudes by saying that the exceptional circumstances have effects other than just negative ones. For example, the focus of appreciating localness in the financing market will largely depend on how unified the local ecosystems will become to meet the demand.
”Right now, Tampere has great momentum”, he says. ”The start-up house of Platform 6 should be completed in the autumn and the timing is perfect as community spirit, local support, and a collective way of doing things will be crucial values.”
Still, Siik would like to remind us that financing decisions are always made on a national or international level. Local examples, such as the Tampere Game Hub, will regardless gather critical mass where joint know-how feeds competitiveness.
”Of course, it would be great if we had more pro bono type of mentoring and other socially responsible activities under normal circumstances as well”, Siik muses. ”I don’t think it would harm anyone to continue helping each other more unselfishly in the name of mutual interest.”
Video links to investment during COVID-19 crisis
Note that video material is available in Finnish only.
- Tesin rahoitustoiminta startupeille
- Miten koronavirus tilanne on vaikuttanut omaan sijoitusstrategiaanne ja mikä on tilanteenne uusien sijoitusten suhteen?
- Milloin uskotte tilanteen palaavan normaalimmaksi ja miten palautuminen mahdollisesti tapahtuu?
- Muuttaako poikkeustilanne pysyvästi jotain rahoitusmarkkinoilla?
- Vaikuttaako kriisi mielestänne jatkossa jollain tavoin rahoituskierrosten valuaatioihin? Jos kyllä, niin miten ja miksi?
- Onko jotain erityisiä ohjeita yrittäjille tässä tilanteessa, jos he lähestyvät teitä rahoituskierroksen tiimoilta? (video will be added on 27.4.)
6Aika – Ecosystems of Growth: cooperation between the Six Cities enables growth for companies
The project supports growth-oriented companies in attaching themselves to networks and services that best match their research and product development activities. The project is carried out by the six largest cities in Finland: Helsinki, Espoo, Vantaa, Tampere, Turku, Oulu, and the Council of Tampere Region. The project is based on the idea of the cities’ active role in supporting the companies’ innovative operations and the networks enabling this.