Fundraising in a Pandemic: Startup Investment Insights + Learnings from 2020

Unprecedented, unparalleled, uncharted territory - we’ve heard it all about the year that was! For startup investment, 2020 sure was an interesting year but certainly not the doom and gloom many initially forecasted. We saw some great activity in the space and some promising startups taking on capital. The LUNA team assisted with over 50 investments in 2020 - seeing over $30 million of capital injected into the startup ecosystem. Based on our work last year, we’ve done a stocktake on startup investment in 2020 and pulled together our key insights. We’ve also gleaned a few tips and tricks for those startups planning to take on investment in the year ahead. 

2020 - KEY INSIGHTS 

Renewed confidence in H2 2020.

The first half of 2020 put a dampener on the fervent enthusiasm surrounding the startup space. Many investors turned their attention inwards to their existing portfolio companies, providing bridging funding and strategic guidance to help them weather the storm. However, the back half of 2020 saw early-stage capital raising pick up again. With a vaccine on the horizon and tenacious founders proving they can weather a global financial meltdown, there has been a flurry of deals that is continuing into 2021.

The rise of equity crowdfunding. 

Equity crowdfunding is taking off in Australia. A mix of sophisticated investors and mum and dad (retail) investors are clamoring to invest in all sorts of up-and-coming startups. Success has often boiled down to a savvy marketing campaign and consumer sentiment on the startup’s specific product. Startups with a physical product that can generate a social media buzz tend to do the best in these campaigns. The jury is still out on the long-term value for both companies and investors. Retail investors will quickly learn that exits take time (and require a lot of good fortune) and startups aren’t too fond (or capable) of distributing dividends. For startups, equity crowdfunding can be a quick influx of cash and an indicator of public sentiment towards your product. However, you lose the deep networks and subtle value adds a great investor can bring to the table. Watch this space.

Government backs startups

The Victorian government is backing startups to drive our economic recovery, and they’ve put a range of funding opportunities on the table to do just that. $60.5 million has been earmarked for the Victorian Startup Capital Fund to co-invest in existing and emerging VC funds. A further $10 million has been set aside in the Women’s Angel Sidecar Fund to back ambitious female-led businesses. We’re excited to see this rolled out over the next year and hope to help our founders capitalise on this opportunity - noting the success of similar initiatives like the QLD Business Development Fund. Founders will still need to be attracting interest from VCs to tap into this funding pool.

More funds to come

All conversations point to an influx of new investors and operators entering the startup space. Expect to see an increase in the number of boutique and mid-sized VCs in the AUS market over the next 24 months. With a maturing ecosystem, money is quickly flowing in to effectively serve companies who are raising their first few rounds of funding (Seed to Series A). As tech companies in public markets continue to outperform traditional business, it is likely that investor interest will flow into the early-stage tech space. 

TIPS + TRICKS FOR 2021

Looking to the year ahead, here are some learnings we’ve collected to help you run a smooth and successful investment round in 2021. 

1. Too many chefs spoil the broth 

Don't have too many investors negotiating the terms of the deal. Negotiating terms with multiple parties are time consuming, results in various versions of the transaction documents flying around and can rack up legal fees. To get the deal done quickly (and cheaply), you’re much better off negotiating the terms with one “lead” investor first (typically the investor cutting the biggest cheque). 

Once the terms have been settled with the lead you can circulate the term sheet or transaction documents to the other investors in almost “final form”. Minor investors should only be providing ‘need to have’ amendments and should otherwise follow the terms set by the lead.

2. Decision making is key 

The terms you’re negotiating don’t just fall away once you’ve taken on the investment funds, they carry on and determine how the Company will operate into the future. So it’s really important that you understand what you’re agreeing to and the practical implications this has for your startup.

The approval process for making certain “major” decisions is key here. Some investors will want broad oversight and even veto rights over key decisions for the business. It’s important you think about how this will play out in practice:

i. What decisions are appropriate to revert to investors on (e.g. taking out debt above a certain amount, selling key IP); 

vs

ii. What decisions should founders be able to make by themselves (e.g employing staff below a certain salary).

3. Keep a lid on your share register

After a friends + family round, some convertible instruments and a seed round, by the time you get to a Series A you may have really blown out your cap table. Add some employees to this mix (once their options vest) and you can rack up quite a list of shareholders. 

It’s important to keep an eye on your cap table throughout the investment rounds and make sure you’re not bringing on too many shareholders. 

There are two main reasons you don’t want a long list of shareholders: 

i. Ongoing management of a large shareholder base is just plain annoying, time-consuming and will rack up the legal fees.

ii. After a certain limit (50 non-employee shareholders) a company must automatically be deemed a public company (not a listed company, just no longer a private / pty ltd company). This means more reporting requirements which equal more accounting fees.  

If you do have lots of smaller investors wanting to invest, see if they would consider setting up a joint investment vehicle. It means only 1 shareholder on your cap table and they can still get a slice of your startup.

4. Keep your cool!

Particularly the first time you go through it, the investment process can be confusing and consuming. We often see founders stressed and worked up about negotiating the terms, dealing with investors and the time frames for completion. The best thing you can do is keep your cool and trust the advisors you have on your side. They’ve seen this time and time again and know what’s up. 

Believe us, there very very rarely is a deadline that is a “deal-breaker”. Rushing into a deal can instead deliver damaging ongoing results for your startup - or to you as a founder. Being balanced and keeping a level head amidst the investment madness will set you up for success. It will also establish a healthy working relationship with your investors who will respect your approach to the negotiations. 

See some more tips in tricks from our 2019 review here. They still ring true!

Good luck for the year ahead!

By Emma Ferguson + Ben Hansky