Raising capital in a pandemic: ‘There is plenty of dry powder looking to get to work in this market’

By Elaine Watson contact

- Last updated on GMT

Investing in a pandemic: 'Good business models with solid, experienced leadership will be more likely to prevail during times of uncertainty...' (Picture: Gettyimages-CnOra)
Investing in a pandemic: 'Good business models with solid, experienced leadership will be more likely to prevail during times of uncertainty...' (Picture: Gettyimages-CnOra)

Related tags: fundraising, FoodBytes!

Clearly, now is not a great time to raise money. But founders shouldn’t despair, said investors in a webinar hosted by FoodBytes! by Rabobank on Wednesday. Raising capital will take longer and investors are being more circumspect, but there is money available for promising brands - even as coronavirus drives much of the world into lockdown.

These are choppy waters and everything is a little uncertain, but we think that food and agriculture is a resilient and stable sector and we’ll continue to make investments in the space,” ​said Amanda Donohue-Hansen, VP at Cultivian Sandbox Ventures​,​ a venture capital firm investing in food and agriculture tech companies.

“What we’re communicating… to startups is that it could take longer to fundraise and capital markets 12 months from now, three months from now… are very uncertain, so we’re saying be open to raising more capital.  

“Get creative, there are other sources of capital, city, state, and even some federal funding, small business loans, and other sources I’d encourage folks to explore.”

[Click HERE​ to see some links to resources for emerging brands compiled by FoodBytes​!*]

‘If you’re pre-seed, I’d encourage folks to consider accelerators’

Amanda Donohue-Hansen Cultivian Sandbox Ventures
Amanda Donohue-Hansen, Cultivian Sandbox Ventures: 'Food and agriculture is a resilient and stable sector.'

She added: “If you’re pre-seed, I’d encourage folks to consider accelerators. A number of accelerators will help provide some resources that can help you bootstrap for longer and continue to make progress on the business, and as the dust settles, coming out of an accelerator or incubator program sometimes there’s funding through those, but more than anything, it’s the network that’s really valuable.

“If you’re on the radar and being marketed by those accelerators you’ll have a lot of eyes on you, so you’ll be well positioned to fund raise coming out of that program.”

‘VC funds will be turning significantly inward’

Michael Lavin Germin8 Ventures​​
Michael Lavin, Germin8 Ventures: 'You should be prepared that VC funds will be turning significantly inward...'

Michael Lavin, founder at food & ag tech VC fund Germin8 Ventures,​​​ added: “We recently closed our fund and we’re very well capitalized and we’ll be an opportunistic fund taking advantage of lots of investment opportunities..

“But you should be prepared that VC funds will be turning significantly inward and being much more patient to see more signs from the market that give them renewed confidence to re-engage and invest. And until then you’re probably going to hear feedback that they are focusing on their portfolio companies and stockpiling their cash reserves for those companies.”

Down rounds?

Asked about valuations, he added: “If you’re at an early stage, you have a major advantage in that there isn’t a valuation trajectory that’s already taken place that might have to be revised entirely coming out of this.”

But he added: “Some of these companies that have raised several rounds at lofty valuations, they are going to be taking down rounds ​[where a private company offers additional shares for sale at a lower price than had been sold for in the previous financing round because its valuation is lower].”

‘Valuations will be a little bit lower, but there is plenty of dry powder looking to get to work in this market’

Brad Blomstrom, principal at Anterra Capital​,​ which invests in human and animal health & nutrition companies, said: “If you're a founder, I'd say overcommunicate to investors the depth of whatever pressure you're feeling right now, nobody is going to ding you for being underprepared for a pandemic, it's more about being on the same page about what your plans are for the next year. 

"Also, get to 12 months of cash either by fixing your burn rate, or finding other ways to preserve cash through dealings with suppliers or vendors; you need to be able to ride out the storm before subsequent funding rounds shake loose."

But he added: "New deal activity has slowed down a bit ​[in part because] we don't know what valuations should be, so if you're dealing with VCs try to be patient. VCs will be slower to do deals, but that’s a very temporary condition.

“When we are a month out we’ll be getting out of our bunkers a bit. Unless your need is immediate, VC will still be a channel, it just might take a little bit longer to close.

Brad Blomstrom, principal at Anterra Capital
Brad Blomstrom, anterra capital: 'You might have some more cats and dogs in a given round as people won’t write bigger checks solo.'

“You​ [also] might have some more cats and dogs in a given round as people won’t write bigger checks solo, and valuations will be a little bit lower, but there is plenty of dry powder ​[money to still invest] looking to get to work in this market.”

Risk tolerance has changed in the last couple of weeks

Tom Spier, founder and managing partner at Boulder Food Group​, a venture capital firm that seeks partnerships with early stage food and beverage consumer product companies, said that "given thedislocation in the capital markets, getting deals done right now that were not already pretty well along will be more challenging. Risk tolerance has changed in the last couple of weeks."

Asked how firms should adjust investment pitch decks, he said: "It's about being realistic about expectations over the next 12 months as it's going to be difficult to get on shelf if buyers are not taking meetings, so don't look like you're not aware of the actual situation on the ground." 

Movitz Group: ‘Capital continues to be available but will be slower to obtain’

Michael Movitz at consultancy Movitz Group​​​ - which works with scores of natural/organic brands – added in his blog post​ this week: “Potential investments are being considered more thoughtfully, including more downside scenarios. Capital continues to be available but will be slower to obtain.

“Stock market volatility has forced many angels, private investors and others who rely on asset stability and growth to make investment decisions to defer new investments for now.”

Many angel and seed investors are tightening their criteria and lowering their tolerance for risk, he added. “Where they may have previously bet solely on the founder of a brand with little market proof or traction, angels are now likely to need a clear and compelling proposition and line of sight to success as a key criteria.”

Some investors will be ‘positioning themselves for a buyer’s market on the other side of this event’

While some investors are “retreating for the short term,” ​however, “they are positioning themselves for a buyer’s market on the other side of this event,” ​he said.

“Reliable asset-based lenders continue to lend for working capital secured by receivables, and in some cases, inventory. Purchase order financing​ [an advance from a financing institution that pays your suppliers for goods you're reselling or distributing to a customer] is still an option for larger purchase orders.”

‘Many will simply wait things out until there is a longer post-event horizon to assess’

In general, he noted, recent consumer behavior (panic buying, pantry-loading) means it’s hard for investors (as well as demand planners) to take action with confidence, “so many will simply wait things out until there is a longer post-event horizon to assess.”

Ultimately, he said: “Investors will make the distinction between a bad business and business being bad.  Good business models with solid, experienced leadership will be more likely to prevail during times of uncertainty.”

*FoodBytes! by Rabobank​ is a pitch competition and networking platform designed to build connections between the most promising food and agriculture startups, corporates and investors.

Fundraising-GettyImages-Brian-A-Jackson

"Uncertainty generally crushes equity and debt markets because of the fear of the unknown, but even in uncertain and challenging times there will be a cohort of investors and lenders that continue to support companies and entrepreneurs...." 

Read more HERE​ ​about how COVID-19 is impacting the food investment landscape, with commentary from Arif Fazal at Blueberry Ventures and Wayne Wu at VMG Partners.

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