Black Swan Event: Fundraising During a Pandemic
According to Johns Hopkins Coronavirus Resource Center, 188 countries out of about 200 countries in the world had reported at least one case of COVID-19 at the time of writing, with almost 4.5 million known and confirmed cases. The coronavirus disease of 2019 has reached an unimaginable scale, and many have called the pandemic a black swan event.
Nassim Nicholas Taleb first published his book “The Black Swan: The Impact of the Highly Improbable” in 2007, and in it, he described Black Swan events as having three attributes:
First, it is an outlier, as it lies outside the realm of regular expectation, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. … rarity, extreme impact, and retrospective (though not prospective) predictability.
For the majority of us, the above description might fit the current situation perfectly, but if you’re like Bill Gates, who mentioned in his 2015 TED Talk that a highly infectious virus is more likely than a war to kill more than 10 million people in the next few decades, then you might have seen this coming from a mile away.
The pandemic has affected many companies globally, and the startup ecosystem in Southeast Asia has not been spared. Many founders had to make difficult decisions to cut salaries, lay off employees, or even dissolve the companies they had spent years building. Investors had to shift their focus in the near term from making new investments, to assessing the survivability of their portfolio companies and providing support where possible. Sustainability has become even more important, especially since there is little clarity on how long the effects of COVID-19 will last.
During calls with early-stage founders, many have asked about the investment climate, and if Genesia Ventures is still actively investing; my answer is always yes. Just as the oft-quoted Chinese word for crisis — 危机 — that is literally made up of two words meaning “danger” and “opportunity”, investors are always looking for companies that could turn a crisis into an opportunity.
Companies that had successfully raised right before COVID-19 could breathe a sigh of relief (albeit briefly), but others who are still fundraising might find themselves having to make significant adjustments.
Rethink your strategy
Your strategy from four months ago might no longer be applicable, whether because you’re operating in a badly hit sector (like travel or retail), or because your revenue model relies heavily on consumers’ discretionary spending. Do not cling on to old strategies because you had spent a lot of time and resources to come up with them. Throw your old plan out the window if necessary. Think about how user behavior will change once economies start opening up and what products and revenue model will work in that situation.
Rethink your valuation
Founders come up with their companies’ valuation based on different factors like revenue, projections, and/or market potential, in combination with the investment climate and fundraising rounds announced by other startups or the competition that are at a similar stage. If you are operating in a sector that is affected, whether in the short or mid or long term, then projections might not be as rosy as expected. Along with the fact that investors are delaying investments or at least becoming more selective in the companies they invest in, it might be a good idea to rethink the initial valuation you had in mind.
Seize old and new opportunities
Did you have a product that you wanted to develop down the line and was low on the priority list, but has now become more relevant? Prioritize it. Did someone in the team throw out an idea that seemed out of the box, but could potentially help sustain the business? Be open-minded and explore the value of the idea. The company might be operating with a downsized team and fewer resources, but it will be crucial to keep team morale up and move forward with the vision and mission. Take this as an opportunity to strengthen the core of the company.
Re-engage investors
If there were investors you had met in the past, especially those who had shown interest, re-engage and update them on any changes in strategy, valuation or direction (but only when they are fleshed out, not half-hearted changes that has little to no impact). It is more likely to get the attention of investors you had met with previously, than new investors you had never met, especially since some investors prefer to meet face-to-face with founders before making an investment (which has become a luxury recently).
Even after making adjustments and doing all of the above, it might still be difficult to raise funds, but building a company has never been easy, and hopefully founders can ride out this crisis, or even turn it into opportunity.