Investment in Progress
In our recent blog article we recommend Angels to react to the Coronavirus outbreak by advising their founders to double check their sales forecasts, hiring plans, costs and basically every other assumption about their business. While caution is essential, disruption can also create opportunities – after all, resource scarcity is an excellent source of creativity. Changing market conditions and new obstacles that need to be overcome may illustrate new ways for startups to scale their companies.
Sequoia Capital, one of the oldest and most respected venture funds, pointed out that “Google and PayPal soldiered through the aftermath of the dot-com bust. More recently, Airbnb, Square, and Stripe were founded in the midst of the Global Financial Crisis.“ While hype may disappear in a crisis, world-class solutions and solid business models will not be ignored. There will always be capital for companies with passionate teams and a strong product market fit.
It’s counterintuitive that during a time of crisis and uncertainty, risk can actually decrease. But as aaia President Hansi Hansmann mentioned in our first webinar about crisis management, pre-revenue startups have actually less to lose. They are not affected by downturns in demand. Consequently, their riskiness doesn’t change much, whereas the one of later-stage companies, whose products and services are already on the market, rises significantly. The only variable relevant for a pre-revenue startup is the time until the crisis ends – if its runway is longer than that, it will survive. And because early-stage startups have zero exposure to the market, they may actually benefit from the crisis, as finding good talent becomes easier and potentially cheaper. On top of that, they have generally speaking no supplier risk and are also less affected by systematic economic shocks (e.g. lending).
Technology will not stop moving forward during a crisis – its development may actually be accelerated. Digitalization, Blockchain and AI are becoming essential in overcoming the quarantine and fighting the Coronoavirus. Necessity is the mother of invention – you just need to look at the right places.
The Austrian government announced a COVID-19 aid fund with a volume of 100 million euro to secure the survival of startups who are threatened by the crisis. Thanks to this fund, private investments by Business Angels between 10.000€ and 800.000€ will be doubled by the state, if the application of the startup is successful. Only in the case of success the subsidies need to be paid back. This gives a huge incentive for Business Angles to increase their investment in their current portfolio and also to look for new startup opportunities. This COVID-19 aid fund significantly increases the runway of invested startups and therefore decreases the risk in times of crisis.
Private investments from Business Angels also significantly increases the success rate of a startup, as shown by a study by the Kauffman Foundation. In concrete numbers, startups with an Angel onboard are 20-25% more likely to survive four years after their foundation and 16-19% more likely to reach 75 employees or more by then.
Additionally, a private VC fund with the volume of 50 million euro will be established specifically targeting startups who would have likely completed a financing round if it weren’t for the outbreak of COVID-19. The special feature of this new fund is that all private capital invested in it will be backed by a 50% state guarantee. Startups can receive between 200.000€ and 1 million euro from this fund. Investments in this fund are an excellent way to support Austrian startups and the local ecosystem. No angel investing experience is required in this case and the risk is much lower than for investments in usual VC Funds.
With this aid measures in place, it is now in the hand of Business Angels to steer their investments through this crisis and make use of the opportunities that may arise along the way.