Seed investors take long view on promising enterprise startups

The job of an early-stage startup founder is challenging in good times, never mind a crash like the one we are experiencing today.

While most expect private investing to slow down, it’s clear that some investments are still happening in spite of the pandemic, if the stories we are writing on TechCrunch are any indication.

But the downturn is bound to have an impact on the types of deals that receive funding; any startup that offers a good or service requiring human interaction or installation will face an uphill battle, at least in the short term. That said, enterprise SaaS vendors, especially ones that solve hard problems, help with work-from-home or collaboration, or better yet, help increase efficiency and save money, are still very much in demand.

Nobody can do anything about the CIO who is hunkering down until things improve — but that’s not everyone. Companies might be thinking twice about where they spend money, but some are still helping drive the net-new, post-COVID-19 investments happening from seed to late stage across many sectors.

We looked at data and spoke to a couple of enterprise-focused, NYC-based seed investors to better understand their investing cadence. Nobody painted a rosy picture of today’s climate, but seed investors were never about immediate gratification, especially where enterprise startups are concerned. That means, if a seed-stage investor believes in the founders and their vision and the company can ride out today’s economic upset, there’s still money in the till — at least for now.

Seed investment generally in decline

While it’s impossible to predict the long-term impact the COVID-19 pandemic will have on private investment, we do have some numbers that shed light on how venture capital changed in Q1.

Alex Wilhem, a TechCrunch editor, dug into today’s formidable reality earlier this month and found that seed investing was already in decline, and the pandemic certainly didn’t help. He laid out what the data was saying, and it wasn’t great:

…the fall in U.S. seed funding was afoot in Q4 2019, well before the public was discussing the coronavirus or lockdowns. It’s fine to say that there is likely some March-era declines in seed funding due to COVID-19 (more on that in a minute), but the pandemic is, at most, partially responsible.

The recent decline in seed funding is so steep it has inverted venture’s equivalent of the yield curve: There were more domestic Series A deals than Seed deals in Q1 2020, with the later-stage investments winning out with 331 deals in total.

The data doesn’t lie, but it doesn’t tell the whole story either. There certainly are still deals happening. We’ve reported on oodles of them in the last several months, but it does mean that the degree of difficulty in getting early funding just got a little steeper.

More recently, there’s data showing that the investing pace — something that comprises a huge portion of seed deal volume — is also trending down in key startup markets like Silicon Valley.

Changing startup priorities

Does this data mean potential founders should throw up their hands? Definitely not. It’s important to remember that enterprise startups are very different from consumer-facing upstarts, meaning that their investability could run counter to one another. And that could mean good advice (or bad news) for some startups isn’t a fit for others.

To that end, if you’re the founder of an enterprise-focused startup and have the money to survive in the short term, you should definitely keep on keeping on, says Ed Sim, founder and managing partner at Boldstart Ventures. He added that a near-term product focus would serve founders well.

“If you just closed your seed round, it’s a good time to hunker down and not get distracted with all the go-to-market stuff right now,” Sim told TechCrunch. He went on to say that his firm has suggested that approach to some of its early companies (“go-to-market” is startup slang for sales and marketing efforts that take a company’s product to potential customers).

But what about early-stage startups that didn’t just raise new capital? The good news is that there’s still money to be found, although firms might understandably be more cautious about how they hand out cash. Jon Lehr, general partner and co-founder at early-stage investor Work-Bench says, “I think that a lot of people still have powder in their seed fund,” a sentiment echoed by Precursor Ventures’ Charles Hudson recently, whose pre-seed firm is also still writing net-new checks to enterprise startups, among other types of new companies.

To raise those rounds, however, investors have changed their approach. Lehr told TechCrunch that the rush of pre-emptive rounds, huge valuations and similar unicorn-era excess have come and gone. Public missteps by Wag and WeWork were already cutting at the growth-at-all-costs mentality that had run the startup show for so long, but now in the COVID-19 era, the change from growth to sustainability has become cemented, even in less consumer-focused companies.

This is hitting across the startup stack, with Lehr saying, “What’s happened is Series As, from what we see and all the people we talk to, it’s a little bit on pause.”

Sim says that whereas before early-stage enterprise companies were looking to use their funding to grow as fast they could, raise again and repeat, that formula could be out the window right now.

“Most companies, unless they’re just so well-funded, are looking at how much cash they need to make 18 to 24 months of runway. Let’s work backwards. What revenue falls out from there and how many sales will I need to achieve that,” Sim said.

Not everyone is shrinking from seed

Sim says this approach will inevitably lead to staffing cuts, especially in the sales and customer success departments. If you aren’t selling as much, you don’t need large groups of people just sitting around.

That said, TechCrunch has spoken to founders from a number of early-stage companies in recent weeks who are working in areas that are thriving in spite (or because) of the pandemic. As you might expect, founders of early-stage companies that help power remote work are thriving.

So some enterprise-facing, early-stage startups are going to raise rounds. What’s special about them?

Lehr told TechCrunch a few things worth sharing about which types of enterprise-facing startups will prove attractive in the new world. He outlined two qualities in a general sense that will help those companies land customers and likely investment: immediate return-on-investment or startups that have zero time-to-value once they are installed. That’s because customers need help now, not in a few months. Products that fail that test and the companies selling them are going to struggle.

And, second, corporates will have to move faster. Products and services that can help them find new velocity (especially to the cloud) are going to see demand.

Getting deals moving

Sim says, at this point, if you are a known quantity to investors, it’s going to help push the deal forward, more than if you are still getting to know one another.

“If we’ve actually had dialogue with founders and spent time with them, which is often the case for most the companies we invest in, you get to know people over 6-12 months before they even start the business. Then pulling the trigger and investing in those founders that we’ve spent time with, that’s easy,” he said.

You can get on a Zoom meeting and there isn’t a lot of time spent just getting familiar with one another. Where it becomes trickier is investing in new companies where you don’t know the founders already, and trying to do that ground work in a video chat is more challenging, he says.

Lehr also highlighted sectors where deals could get done, noting things like cloud-related devops and startups that are operationalizing AI, adding that his firm is “looking actively in other areas within AI/ML [with] vertical use cases where you have the domain expertise.” That’s narrow, sure, but Work-Bench is thesis-driven, so it’s going to have tailored expectations.

Yes, the economy is bad. Yes, seed deal volume is probably falling. But no, there’s no cause for zero hope. Many seed-stage investors have money and some are still cutting checks into enterprise-facing startups.

It’s just going to be a thinner harvest with fewer choices, so you’ll have to be focused where the market is headed to get something done.