Fundraising During a Pandemic with Point Nine Capital Managing Partner Christoph Janz

Alright, thank you so much, Debora and Taimi, for having me here today. And thanks, Jason M. Lemkin, for setting this up, and Oana Mihai for inviting me. And everybody, good morning or good afternoon, wherever you are. I hope you're all safe and healthy, first and foremost, and thank you for taking some time out of your busy schedules to join us here today. I'm Christoph Jans, I'm a partner at PointNine Capital, and as Deborah said, I'll talk about the topic of fundraising during a pandemic. And if you don't know about PointNine yet, just a short introduction. We're an early-stage venture capital firm focus primarily on B2B SaaS and B2B marketplaces. We're based in Europe, but we invest, well, first of all, all over Europe and also in the US and Canada and occasionally in other places. And we've been lucky enough to have been an early-stage investor amongst the first investors in companies like Algolia, Contentful, Typeform, Loom, Zendesk, and many others. You can see some of them here on the screen. And here is a picture from what we call the Pointnine family at our last Founder Summit in Malta in October. And here is another one from a year earlier in Barcelona. And you can even see Jason here. Good times. Jason M. Lemkin was kind enough to join us during that Founder Summit, and we're obviously hoping that we'll soon be able to do events like that in the real world. And until then, we'll do virtual events. So what does it take to raise capital in SaaS? That's a question that we've looked at in the past, many times actually. You might have come across one of our SaaS funding napkins, and there was a blog post that we— that I wrote a couple of years ago where I tried to answer that question, what it takes to raise capital in SaaS, on the literal back of a napkin, and it kind of developed a life of its own. And so we produced some real physical napkins, and we did that again in the next year and in the year thereafter. However, we have not yet created the pandemic version of that napkin. So like SARS funding in a global pandemic is truly unprecedented, so we don't have that napkin yet, but let's try to approach that question. So let's take a quick look at the current state of things. And I think most of this is probably not going to be new to you, so we'll do this part pretty quickly. As you all know, large industries, large important industries such as travel, automotive, restaurants, are down 40 to 90%. The US unemployment rate is expected to hit 25%, or if not 25%, then something in, in that neighborhood. Early-stage financing deals seem to be down around 50% year over year. It's still a bit early and there is a reporting lag, but I looked at the financings announced on Crunchbase between the April, first part of May period, and compared that to the same numbers a year ago, and it seems to be that the number of early-stage financings is about 50% down. And private market valuations are expected to drop around 30% or anywhere between 25 or 35%. It's too early to tell. There haven't been enough rounds yet, or there aren't enough data points to really know, but I think this is what people expect and what is also, what also happened in previous crisis. Now, on the other hand, the NASDAQ recovered all of its losses from the big drop in March and is close to an all-time high. If you look at SaaS stocks specifically, they've been skyrocketing in the last couple of weeks and months and have gained, I think, I don't know, 15% or something like that from since the beginning of the year. So no signs of any crisis there. Shelter-in-place and work-from-home drive demand for everything that's digital, whether that's in B2B SaaS for tools around video conferencing, remote collaboration, or whether it's for consumers with like online fitness applications and Netflix and all of that. And maybe also to mention the good news, VC rounds are happening, so it's not like the the market is dead. Maybe it was dead or almost dead for 2 weeks following the initial lockdown in early, mid-March, where everybody was kind of shocked, but we're definitely seeing rounds happening, and we'll get into some more details in a little bit. But the question is really, what's going on on the On the one hand, the world is obviously not in a good shape, and there is a huge amount of human suffering, and I think that will continue to take a long time. I'm actually particularly worried about both the direct and the indirect consequences of Corona and COVID-19 on developing countries, both in terms of the direct health implications and like more indirect factors regarding food supply and so on. But we're not talking about that today. We're only talking about like the economic impact and what it means for founders to fundraise in a a time like that. Now, if you look at the consumer spending and how it's changed from January to February— sorry, from January, February to March, you can see that the impact of the crisis on different industries varies drastically. Like, there are categories like sports equipment or fashion, events, cars that are down drastically, and then there are other categories, and I've mentioned some of them already, that are seeing a huge increase in demand. And I think that explains why the picture is so nuanced. Like, it's not like everybody is losing, especially in the tech world. It's not like everybody is is hit hard, and therefore, it's also hard to give general advice. For example, if we now look at the, like, more specifically or more relevant for most SaaS companies, the expected business-to-business technology spend, there is an estimate from Forrester Research, and according to that, The increase will be lower than previously planned, but the technology spend is still expected to increase. Not at the same pace as previously thought, but they still expect technology spend and also in particular software spend that you, what you can see on here on the slide, they still expect that to grow. So, I don't think that tech companies across the board will be hit hard beyond like the short term, obviously. So if you hear advice such as everybody should cut burn by 15 to 20%, I'm not sure if that's the right advice for everybody. It's well possible that it's right for a lot of companies to just increase runway and be on the safe side in a crisis like this, but it always depends on a lot of very individual circumstances. What about SaaS in particular? If you're selling to SMBs, especially then, you are probably faced with additional churn because some companies will just go out of business. Customers, both on the SMB side as well as enterprises, might ask for discounts or deferred payments. There might be disruptions to your sales and marketing channels or motions, probably primarily on the enterprise side, where a lot of lead generation depends on physical events, event marketing, or where you maybe use field sales to close deals. That might have a negative impact on you. Sales cycles are probably longer because enterprise buyers are just really busy with their top priorities right now, and everybody is just becoming more risk-averse and a bit cautious. And again, here on the other side, there is an unprecedented demand for everything that helps people with remote collaboration. There is huge growth in telemedicine, tele-education, and all of these sectors. There is also the assumption, and it's maybe a bit too early to tell if that's true, but I do believe that because of everything that's happening now, the digital transformation gets higher priority than it previously did. I think a lot of large corporations now see that their offline business is in trouble and maybe the online business is the only thing that they currently still have. And I think there is some hope that the benefits of the cloud might become apparent even to the last one, to the last person who would like to have a server in their office, which they currently have trouble accessing. And maybe last but not least, there is a chance that sales is actually getting more efficient because there are no physical meetings. Everything is happening over the distance. And if you manage to still close enterprise deals over the phone, then you might actually be able to decrease your customer acquisition costs. So again, here, my message is, that there is not one diagnosis of this issue and therefore also not one cure or remedy. It always depends on a lot of different factors. But now let's come to the actual topic that we wanted to focus on, which is fundraising. It's not a great time to be fundraising. Let's make no mistake about that. If you are not in this category of COVID-19 beneficiary, like video conferencing, telehealth, tele-education, for them it's easy to raise because they see such strong growth. But if you're not in one of these categories, then it's most likely going to be harder. And if you can increase your your runway, decrease your burn, maybe do an internal round, that is certainly something to consider. But on the other hand, nobody really knows how long this crisis will take, how long the recession will take, if it's going to get worse before it gets better. And I think there are a lot of companies that have no choice but have to raise sometime within the next weeks or months or— 6 to 12 months, and it's primarily for them where I— it's primarily those companies that I had in mind when I tried to put a couple of tips together. My first tip is that you should have a very clear COVID-19 assessment, and I think it's something that you should address proactively as part of your pitch. There are a lot of questions that you need to answer. Have you seen or do you expect an increase in churn, both with respect to logo churn and ARR churn? Are there changes to your conversion rates? Is your lead generation impacted? What about pipeline development, sales cycles, pricing, payment, other changes in customer behavior or user behavior. So lots and lots of questions. Burn rate, your targets in 2020, how is your team doing, has the work-from-home situation changed, where you're going to hire in the future and how you're going to hire. So there are a lot of questions and now, that we're about 2 or 3 months into the crisis, people expect you to have some answers. Obviously, there are still a lot of questions, and it's okay to admit that uncertainty. It's okay to have multiple scenarios. I think nobody expects you to have all the answers, and really nobody knows how the next 12 or 24 months are going to look like, but you should have done your homework by now, and you should be able to talk about the impact of the crisis on your company and what you've done to mitigate the negative impact, as well as to seize opportunities, if there are opportunities that have come out of this. If COVID-19 has accelerated your growth, which, it has in a couple of companies, and I mentioned some of the relevant categories here already, then that's awesome. But not every SaaS company is in a position to benefit from this. Not everybody can or must be one of the companies that benefits from Corona. So Don't try to make this up, just provide an honest and transparent assessment of how you are affected and what your actions are to address that. My tip number 2 is that when you go out fundraising, you should start with an extra long list, like longer than usual. And there are primarily two reasons for that. Number one, or reason A, is you might have to. Many investors are cautious and busy with their portfolio, as I'm sure you've heard or read or maybe found out in discussions. So the bar is just higher than the than it has been in normal times. And it's also possible that firms will drop out of the process because they struggle to build conviction without meeting you in person. And that's something I'll try to address in some more detail in a minute. But you just have to expect that you will get more nos or more people that go silent or are just not excited for various reasons. And that is a— good reason to start with a longer list from the get-go. The good news is that you can. There is no— no coffee meetings, no dinners. The process is a lot more efficient, which means you can start with a much bigger long list and run a process where you talk to a much larger number of investors in parallel. And I have a nice quote here from Nimrod Priel, the founder and CEO of a company called Radical, which has very recently raised a round of financing. And Nimrod wrote a blog post in which he said, "The one advantage you have right now is that there are no face-to-face meetings." "So there is no commute, wait in the lobby, order coffee overhead. I fit 7 to 8 pitches a day while spending 7 hours with our 2-year-old," and so on. I thought this was really nice. And we've also seen this in our own portfolio. Here is a quote from a company, from a founder of a company in our portfolio that has just closed a Series A. It's in German here, but I can give you the takeaway in English. And what he said was that the long list should be larger than normal, as many investors drop out just because of the special circumstances currently. It took us 2 weeks less than planned to get to a term sheet. And without traveling, it's much easier to talk to many investors in parallel. So he actually kind of enjoyed the process more than the normal process with a lot of meetings, travels, coffees, dinners. So there is a positive side to that as well. Now, if you have a long, very long, long list, then it's very important that you disqualify ruthlessly. And that's my point number 3 here. It's usually either love at first sight or never love when you meet investors. Obviously, there can be exceptions, but I think in most cases, either people get excited pretty quickly and then they do their work to confirm their assumptions, or they will just never get excited. I think if the initial excitement isn't there, then you can probably spend your time on other leads. So make sure that you focus your really scarce time on the best leads. And in that sense, it's not that different from an enterprise sales process where you also want to create a large top of the funnel because that gives you then the opportunity to cherry-pick the best leads rather than spending time with wrong leads that are just unlikely to convert. And you probably also, you probably don't wanna be the one who teaches an investor to do his or her first remote investment, just like you probably don't want to be the SaaS company that teaches somebody in another company to buy software for the first time or to buy SaaS for the first time. So you probably wanna focus your resources on, in this case now, investors where you think they won't struggle with the process just because they cannot meet you in person. And I have another, very nice quote on that topic from another awesome Pointnine family founder who a couple of weeks ago sent me a narrowed-down list of what he said, the prospects that he thought were still realistic to write a term sheet. And then he said, "My criteria for realistic is that they followed up with the right buyer questions a few days after sending data room." and then scheduled a follow-up call. And I think this was really awesome. It's very rare that I've seen kind of qualification of investors with that clarity. I think the more natural and also understandable behavior for founders is to be optimistic, maybe overly optimistic, and to assume that everything went great because that's also the signals that investors tend to send because they wanna create, like keep their options open. But I think it's really smart to try to really read the interest from investors realistically, and then just not waste time with the wrong ones and focus on the right ones, or maybe even change your plans if you come to the conclusion that this round is just not happening right now. Tip number 4 is that you should have a killer deck and killer due diligence materials. And this is actually something I've been talking about for a long time. But I think now that a larger part of the process is asynchronous, it's even more important that all of the materials that you share are in perfect shape. So You should have a data room with all the important KPIs, and that should be ready before you have the first pitch, because once you do, there won't be time to put all of this together. And everything should be either like obvious or self-explanatory, or there should be notes to minimize the back-and-forth clarifications. It's also a good idea to create an FAQ or a similar document to preempt some of the due diligence questions which you will probably get from investors. And what we've also seen founders do, which I think is a great idea, is to provide a narrated version, like a Loom, of your deck in addition to sending over your deck. So just think about the fact that a much larger part of the process is now asynchronous, which means there are fewer opportunities for you to convince people in a meeting, to just wing it. The materials that you provide, kind of like the product, is even more important than it previously was. And the last point I wanna talk about is that you need to build trust and maybe learn to build trust remotely. It's not a no-brainer for investors to invest over the distance. They still have to adjust to that, and transparency builds trust. So consider inviting VCs that you're in a process with to your chat module, to internal dashboards, share KPIs with them. Early on. Be super responsive, that's probably a no-brainer. What we like a lot at PointNine, and I'm assuming it might work with other investors as well, is to do working sessions, and that can be a remote whiteboarding session, but it can also be that you collaborate asynchronously over a couple of days or maybe a week in a document or in a presentation to figure out something like a go-to-market strategy or a hiring plan. And I think that actually gives both parties, both sides, a chance to get to know each other better and to kind of do a bit of a mutual try before you buy. Then I've heard walk-and-talk meetings with 6 feet apart or beers over Zoom to kind of socialize. I don't know yet. I don't know if that's going to be a thing, but maybe if the lockdown continues, then maybe those are some of the things that people will do. To conclude here, I have pasted a post from Martin Mignon, a partner at Index Ventures, which I thought was interesting. So what he asked here was, how can you get a sense for a company's culture without visiting their office and hanging out at the coffee machine? And then he suggests to do a couple of things like check their interview process, ask for their internal newsletter, ask for their employee engagement survey, join one of their team meetings as an observer. I think what this goes to show is that there is such a strong need from on the investor's side to really get to know you, get to know some of your colleagues, and build trust before you make this big decision to invest millions or maybe tens of millions of dollars or euros into a company and dedicate, commit a large, a significant part of your time to it for many years. So try to put yourself also into the investor's shoes and think about everything you can do to build trust. If you're currently not raising, but you're planning to raise capital sometime within the next 6 to 12 months, it might be a good idea to start building some relationships now or to warm up some existing relationships. Maybe have a— maybe invite investors to follow you, to subscribe to your internal investor newsletter. I'm usually not a big fan of this. I think in normal times, it's usually a waste of time to spend too much time with investors when you're not fundraising because in normal times, you can just focus on your business and by the time you want to fundraise, you set up all the meetings and you do your pitch and you compress everything in a tight process. And I think that's usually the best— that's usually the advice that I like to give. But I think in the current times, this might be a bit different because the trust, developing trust is so important and it's different and more difficult right now. So now might be the time to invest some more of your time into building these relationships ahead of when you need them. So just to wrap things up again, there are 5 pieces of advice that I'd like to leave you with. Number 1, have a clear COVID-19 assessment. Start with an extra long, long list. Disqualify ruthlessly. Have a killer deck and killer due diligence materials. And build trust remotely. That's all I had. Thank you very much for your attention. I'm still around if we still have some time to take some questions or discuss things. Otherwise, you can reach me on Twitter, on my blog, on Pointnine's Medium channel, and also via email. So thanks again, everybody, for your attention.