A joint survey conducted by the Startup Estonia and Estonian Founders Society in April shows that the average self assessment score of 99 respondents about coping with the crisis is 6.7. However, in order to survive and continue growth, more than two thirds of startups need investment this year.
Another study conducted by the Estonian Private Equity & Venture Capital Association (EstVCA) and the Estonian Business Angels Network (EstBAN) in April revealed that private and venture capital funds and business angels operating in Estonia continue to invest in their portfolio companies and are ready to make new deals even in the time of crisis, even if more cautiously.
"In the next four to six weeks, I think it is pointless to try to engage in new investor relations," said Sten Tamkivi, Vice President of the Estonian Founders Society, speaking at a webinar organized by law firm Sorainen. According to Tamkivi, local VC funds confirm that they are still looking for new investment opportunities, but the reality shows that fund managers and investors are mostly occupied with helping their existing portfolio companies.
According to Anu Oks, CEO of EstBAN, the situation is rather the opposite – startups assume that investors are not open to new investment opportunities and are less inclined to approach them. She added that today's difficult situation actually offers many new opportunities for cooperation and investment.
According to the EstVCA and EstBAN survey, 75% of private and venture capital fund managers confirmed that the runway of their portfolio companies is longer than six months. Most funds are planning follow-on investments, if necessary. Half of the funds will continue to invest on the same basis as in the pre-crisis period, but some are adjusting their strategies. "Of course, the willingness of funds and angels to invest does not mean that all startups and growth companies significantly affected by the crisis will find a solution to their financing problems. The investment criteria of the funds are the same or even stricter,” said Margus Uudam, Chairman of EstVCA.
Startups facing difficulties, some see silver lining
Many startups are facing difficulties. The Startup Estonia survey shows that two thirds of startups are experiencing a decline their revenues. More than 60% of the startups have cut costs, 35% have reduced wages and 19% have already laid off employees. Just over a half of the respondents have less than five months of runway, and a fifth run out of money within the next two months.
The results of the EstVCA and EstBAN study also confirms this. 64% of companies in the angel investors’ portfolio are negatively affected by the crisis, and 20% of companies will probably close down in less than three months. At the same time, for 14% of the startups, the impact of the crisis has been positive and new opportunities for business development are opening up.
Also the Startup Estonia and Estonian Founders Society survey confirms the silver lining of the crisis to the startup world. Almost a tenth of the respondents have seen their incomes increase and 35% see strong opportunities to grow their business.
According to Tamkivi, the teams that failed to raise money last year are likely to die this year. Top professionals would move to startups that have been able to provide or develop new services during the crisis.
Looking towards the government
Estonian VC fund managers and angel investors pointed out that they are currently waiting for a concrete message from the government about the plan to gradually reduce the restrictions related to the crisis. "It is necessary to provide information on the virological criteria on the basis of which the restrictions will be relaxed. This information would help the investors and companies to establish their own strategies more precisely,” Uudam shared the position of the investors.
According to Tamkivi, the government should consider bridge financing measures to help potentially successful startups past the downturn cycle and keep them on a normal growth rate. On the other hand, he added that the state alone would not be able to find the right startups, because in general the state is a rather bad investor. That is why Tamkivi recommended creating a state fund for financing startups, following the Development Fund (existed in Estonia in 2006-2017) model, where the startups, in which also private investors agree to contribute, are financed.