Founders deserve some straight talk on raising venture dollars in today’s market. What does “open for business” really mean for VC funds in the age of Coronavirus?
The global VC market has completely locked up, and we don’t yet know when that will change, writes Gil Dibner, the founder of VC firm Angular Ventures, on Medium.
This became painfully obvious to me today when a few growth stage bankers started reaching out to me (at Angular, a very early-stage fund) to see if we want to join $10M rounds. That means they are running out of options and making totally irrational calls.
Paused, lying, or stupid. While the web is still full of statements to this effect, any VC saying they are “open for business” or “business as usual” is lying or stupid. You probably don’t want either on your cap table over the long run. The only exception to this is the 10–20 “tier 0” VC funds that are eternally enduring and probably have tons of dry powder available to them at any given moment. Funds in that class are uniquely able to operate across any part of the business cycle and can completely rationally deploy capital even when most other funds slow down. If you are unsure if a fund you are talking to is on this list, it’s not. But even those funds are likely to slow deployment pace as well.
So is anyone investing? Is Angular Ventures considering new investments? The answer is “yes, but effectively no.” Angular is still considering new investments. We are actually in the process of evaluating a specific (and very special) opportunity this week, but our stratospherically high bar is now astronomically high.
We are still actively looking for opportunities — and we know that some great opportunities can be found in incredibly challenging times. But that said, we are also making a real effort to triage deal flow very early in the process to give founders definitive feedback (i.e. “no” in 99.9% of cases) within hours of getting their material so that they can focus on more promising leads and so that we can focus on other things as well.
If you think the 99.9% figure is hyperbole, it’s not. We evaluate thousands of opportunities a year. Given the situation and the expected trajectory of this thing, I’d expect us to do 0–2 new investments between now and year-end. At that rate, and given the deal flow we see, a 99.9% “no” rate is probably lowballing it.
Why the slow down? There are three reasons why a dramatically slower investment pace makes sense.
-- Dry powder for better times and existing portfolio. The main reason is that capital is (right now) better deployed in different ways (portfolio) and better times (later). The goal here is to have dry power to deploy when visibility increases and to be 100% certain our portfolio has weathered the storm to the extent possible. To suggest anything other than that our #1 priority is making sure our existing portfolio companies are positioned to weather the storm would be wrong and irresponsible. That’s what “partnering” means. Angular is lucky to have significant dry power relative to our fund size — but we need to use it wisely. Founders also need time to adjust their plans, products, teams, and fundraising strategies to the new world we are entering.
-- Impossibility of meeting in person. We have invested in early-stage start ups (once) without physically meeting a team due to some very unique geographic/logistical circumstances. We did a ton of due diligence and are delighted to have made that decision (fingers crossed on a major customer contract in the coming weeks!). But in general, we are strong believers in the power of the physical meeting to communicate values and build trust — two things that are essential (in our view) to successful early-stage high-conviction investments. There is no question that the inability to meet founders in person is going to drag down the pace of fundraising for Angular and, I suspect, for any early-stage VC (or founder) who is honest with themselves. We are still going to do it, but it will be much easier and faster when the temporary slowdown end.
-- Uncertainty is increasing at an increasing rate. Right now, with cities under lockdown and both cases and — tragically — deaths rising at exponential rates, the rate of uncertainty in the world is itself increasing at an ever-rising rate. This is unsustainable. It will eventually and by necessity stop. No matter how bad the situation gets, it will inevitably start to improve. There are reasons to think this will happen sooner than some of the more dire predictions, but it will happen. More importantly, the level of uncertainty will start to drop at some point , and at that point, VC dollars will start flowing a bit more easily. Making difficult business decisions (i.e. making a VC investment decision) under conditions of exponentially rising uncertainty is foolish. We’ll all be wiser in a few weeks and certainly in a few months. LPs are paying VC GPs to be wise custodians of their capital — and at the present moment, the wisest thing GPs can do is wait on new investment decisions. Not forever and not until there is “zero risk” but until the size and shape of the risk is better understood than it is right at this moment.
Doubling down on transparency. I hesitated to write this post. I feared that I may be being too transparent on our thinking and scaring away founders. Ultimately, however, I think it’s healthy for the ecosystems we operate in to be as transparent as possible, especially now. “Zero bullshit” is one of our core values at Angular Ventures — and this post is, I hope, a strong example of that.
Uncertainty and certainty
We’re in the midst of a dramatic transformation in the market and in the startup ecosystem. And the pace of that transformation is accelerating right now, which means our ability to predict the future is decreasing right now.
We are all careening down a dark highway at increasing speed, the fog is thickening, and the headlights just went out.
But even under those conditions, four things are for sure:
-- This is going to be very tough in every way: physically, emotionally, socially, economically.
-- We will get through this, as people, as communities, as industries, and — yes — as companies, in most cases.
-- CEOs, founders, and investors need to start planning now for unprecedentedly difficult conditions for a very long time. Cash is King. Revenues are golden. Cut expenses. Strengthen relationships.
-- Tech, business, and venture just got really interesting again. The past few years were disarmingly easy. The next few will be difficult and fascinating. Buckle up.
So are we open for business or not? Hell yes.
Yes, we are definitively open for business. But we are trying to be extremely clear-eyed about what that actually means. It means our bar is higher than it has ever been — and we are embracing that high bar as a way of preserving our performance through challenging times. Angular has always been a very low-volume, very high-conviction early-stage fund. In many ways, this is business as usual. But the world has changed, and we are reflecting that in how we assess opportunities.
If you are building something awesome in enterprise tech in Europe or Israel — we want to know about it. We are as committed to finding those companies and backing them as ever. Let’s talk. We promise you zero bullshit.
Angular Ventures is a London-based specialist venture capital firm backing early-stage deep technology enterprise companies from Europe and Israel. The firm was founded by former DFJ Venture/Threshold Ventures partner and Index Ventures principal Gil Dibner.