© All rights reserved to Barnea Jaffa Lande Law offices

Startup Funding in the Coronavirus Era

Startup Funding in the Coronavirus Era

Get up in the morning, go to work, sit in meetings, pick up the kids from school, go to the grocery store, work out at the gym, or just meet up with friends and family. It’s hard to believe that until a few weeks ago this described a normal day for most people. It’s clear today that no matter where we work and where we live, the reality of our lives has changed immeasurably thanks to the new player in the market-the coronavirus.

 

Israel has been recognized in recent years as one of the leading high-tech and technology nations in the world. But even our local startup nation, successful and progressive as it may be, will suffer a painful hit in both the short and long terms.

 

In order to mitigate the damage, we review here and bring to your attention the key effects the coronavirus will have on startup fundraising.

 

The effects of uncertainty

 

Newspaper and economic enthusiasts are accustomed to seeing a wide range of articles every day reporting success stories on local startups who’ve completed fundraising rounds or exits in Israel and around the world. Today’s market expectation, contrary to what we’ve grown accustomed to in the field, is a lack of investments, especially in early-stage startups, as well as a decline in the valuation investors are willing to invest.

 

The spread of the coronavirus has prompted investors to change their risk preferences and forced them to recalculate their trajectory. For example, VCs, which already operate in high-risk environments, will need to adapt to the economic effects of the pandemic. The uncertainty in the market and the fact that it is impossible to know what the world will look like after the crisis leads to over risk, which even bold VCs are in no hurry to invest in.

 

The concern from VC partners

 

As is well known, behind every successful VC are many investors and partners who undertake significant investments throughout the VC’s life cycle. The combination of a global crisis and a cloud of uncertainty hovering over the entire economy can create concern not only for startups hungry to receive these investments, but also for the VCs themselves.

 

When VCs want to invest in a new venture, they use “capital calls” to collect money from investors. Therefore, if a VC’s investors do not meet their commitments and refrain from transferring funds, this can create the problem of VCs not realizing planned investments.

 

It is not inevitable some investors in the VC will even stop paying management fees. These management fees are required to manage the VC on a regular basis, as well as for the payment of employees’ salaries, rental of the property, etc. Failure to pay the management fees could lead to a significant reduction in the VC’s activities, and in extreme cases even to its closure.

 

The effects of quarantine

 

The most significant impact will be on early-stage and new companies in the market. An essential part of the search process for new investor is a face-to-face interaction, which is now restricted. It is hard to believe VCs will invest their money based solely on Zoom meetings.

 

The uncertainty, coupled with the fact that there is no time estimate for the end of the crisis, means startups planning their budgets based on investments, must be cautious and consistently ensure the money they have will hold them above water, at least until the storm passes.

 

The dizzying pace of infection around the world has also resulted in the cancellation of dozens of conventions and conferences. This directly affects companies’ ability to connect with partners, prospects, and new investors. There is no doubt a key element driving a startup’s lifecycle is fundraising and finding new opportunities. In the current reality, startups must show initiative and creativity in eliminating the need for physical meetings, whether through communities of entrepreneurs from the same field calling for virtual conferences, or by investing in a company’s technological interfaces to maintain continuous dialogue with investors and create fruitful collaborations.

 

Turning oranges into orange juice

 

This is not the first time the planet has been hit by a crisis that disrupts business and routine operations in Israel and around the world. Similar to other crises, even now, there are various opportunities the Israeli economy must exploit in order to emerge stronger at the end of the road.

 

With the number of coronavirus cases increasing every day, there is a call for the technological community to locate innovative technologies to help prevent the coronavirus from spreading. Our startup nation has joined the mission, and one by one, companies are offering new capabilities, especially in the medical field, which has moved to the frontlines. These technologies include monitoring and detection of virus carriers, monitoring the medical condition of patients without physical contact, immediate innovation in medical devices, shortening and improving examinations, alerting confirmed patients, etc.

 

The medical world is not the only one facing new challenges. Investors will soon focus on technologies that streamline working from home, remote management, shipping and delivery, and insurance and finance. The world is hungry for new technology to herald the future, and as time passes and information about the virus increases, our local market may offer the newest hope.

 

It’s true the world is experiencing a crisis the likes of which it has not seen for many years, if at all. However, at this point in time, when some say the peak is still ahead, it is very difficult to assess the level and intensity of the damage.

 

However, from the point of view of VCs or angels, the fact that it is now more important for startups to maintain liquidity than the theoretical value of its operations, may help generate investment opportunities at much lower valuation than we were used to seeing before the coronavirus era. The companies that succeed in raising money during this period are likely to find themselves on the other side of the “rabbit hole,” in a world with fewer sources of investment. On the other hand, it’ll be a less competitive arena for startups trying to raise money.

 

Thus, despite the uncertainty, it is too early to start eulogizing the Israeli startup scene, as new opportunities may emerge. This may even be the finest hour for some local startups.

 

****

For more information contact a member of our Corporate team. 

 

 

Enter your email for newsletter sign up: