While it’s irrefutable that NYC startup investment activity has slowed as a result of the global pandemic, there are terms sheets still being sent and checks that are being written. Our friends at Eniac Ventures hosted a virtual panel with some of NYC’s prominent Seed-stage investors to discuss a variety of topics across the early-stage funding spectrum in the wake of COVID19. Joining the panel to offer actionable advice for founders in the Seed universe were:
- Graham Brown, Partner at Lerer Hippeau
- Eliot Durbin, Partner at Boldstart Ventures
- Hadley Harris, Partner Eniac Ventures
- Melody Koh, Partner at NextView Ventures
- Micah Rosenbloom, Managing Partner at Founder Collective
What is Seed?
As Melody Koh of NextView Ventures pointed out, there are no steadfast definitions of what a Seed round constitutes these days; it does tend to encompass companies that are not yet post-product-market fit and check sizes can go as high as $4-5M per round and as low as $500K for Pre-Seed.
Runway and What Does a Seed Round Buy Now
Seed rounds have traditionally been structured with the expectation that they will provide eighteen months of runway historically to allow teams to execute, hit their metrics, and establish product-market fit to get to their Series A rounds. Given the uncertainty with the economy with the pandemic, the consensus on the panel is that seed will now stretch to twenty-four months to even as high as thirty-six months. However, as Hadley Harris of Eniac Ventures indicated, companies that are severely impacted by COVID both positively (telehealth) and negatively (retail) may alter the time horizons that investors are anticipating.
The panel indicated that they have not seen a decrease in valuations even though many investors in the ecosystem have expected this, especially considering that we have been coming off of a frothy environment. Eliot Durbin of Boldstart Ventures contends founders are still dilution-sensitive as ever. Harris pointed out that there may be a 25%-30% correction in pricing that may take some time for the market to capture. Koh added that some founders are taking in additional capital to have it on hand through the pandemic at previously agreed upon valuations.
Trends in Seed
Venture firms that are traditionally focused on Series A rounds are now looking into Seed round investments as they are able to write smaller check sizes (with less perceived risk given dollar amounts). For Seed founders that means activity is at or even may exceed pre-COVID levels as Micah Rosenbloom of Founder Collective pointed out. Graham Brown of Lerer Hippeau added that VCs are able to push through many Seed deals at the partnership level at venture firms as one of the primary considerations being evaluated at the Seed-level is the strength of the team in the absence of other metrics that a more established startup would be expected to have.
Durbin points out that for companies that are “in the valley between Seed and Series A”, closing that A round has been a long process even before COVID. Many experienced founders in the enterprise space are breaking up the rounds into multiple parts to close quickly while some founders have been cautious about the ability to raise in the future and are taking in rounds all at once.
Most on the panel have invested in founders that they have never met in person. Some had even done so prior to COVID. The technology systems in place are supporting the ability to do this but sometimes it’s just not the same as in-person meetings, especially considering that a Seed investment may be the start of a 10-year relationship. All the investors, just like the rest of society, are adjusting to the new realities. Harris mentioned that his team has taken socially-distanced meetings with founders in Washington Square Park and on the West Side.
While no investor is able to predict when the pandemic will be over and if and when we will return to the pre-COVID normal, the panel agreed with the expectation that this virtual reliance will continue at least through the summer and into the fall and investors are prepared to conduct business virtually until then. Larger events that attract founders and investors will likely be halted well into 2021 according to Harris.
The panel concurred that when we do resume “normal operations” meeting will be based on the comfortable levels of both parties and there will not be pressure to meet in person. Brown pointed out that the industry is already using technology and infrastructure to conduct business remotely and this will continue given that it has been efficient. In some cases, it has been a more effective use of time for investment teams than previously. Despite this, the investors all agreed that they miss the spontaneity of meeting at an event or grabbing a coffee with someone to get to really know them.
With the movement towards virtual, Rosenbloom indicated that this an opportunity for founders to bolster their social profiles and capture the attention of investors. It’s another touchpoint for investors to “get to know you” at a time where everyone is diverting their attention to online activity. Also, in the absence of events where associates and principals would be sourcing some of their deal flow, both Durbin and Brown advocated that founders can send tailored, personalized, and relevant cold emails to firms and that this method is often underutilized.
Opportunity and Trends
Enterprise infrastructure plays are extremely important as the pace of digital transformation has accelerated due to COVID according to Durbin. According to Brown, the behavioral change due to the pandemic will present opportunities for founders that are able to devise solutions that now have the opportunity to capture widespread adoption on the consumer side. Telehealth is just one example. However, Harris warned that founders should not be chasing the shiny, object when it comes to the next best thing and still need to focus on building a sound business and cutting out the noise.
On the hiring side, Koh and Durbin pointed out that founders also have an immense opportunity with the talent that is available due to recent layoffs. Freshly funded startups are able to capture professionals that likely would not have been able to hire before.
While the world has undoubtedly become flatter, all the investors on the panel believe in the continued success of the NYC Tech ecosystem and do not expect a mass exodus in terms of startup activity in the city.
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