In April, we reached out to our community of founders and asked them to give an honest assessment of how they’re weathering the COVID-19 pandemic. The DocSend Startup Index: The COVID Impact catalogs the experiences of 250 startup founders and covers some of the hard decisions they’re being forced to make such as lowering or maintaining valuations, adjusting fundraising and product release timelines and cutting staff and overall costs. Below, we feature a few key metrics from the report and our Q&A interview with Michael Brown of Bowery Capital.
Q&A with Michael Brown, Managing Partner at Bowery Capital
Michael Brown is a Managing Partner at Bowery Capital, an early-stage VC focused on helping founders build the next generation of b2b market leaders. Here are his thoughts on the acceleration of the cloud movement, three key factors he looks for in pitch decks, the current valuation environment, and the importance of optimism.
We recently did a survey and found that 65% of the founders we talked to reported that their business was either maintaining or growing. Do you think that’s reflective of how adaptable tech has been during the pandemic?
I don’t know if I would say it is the adaptability of tech. Our focus at Bowery Capital is on business software and most of what we invest in sits at the application or infrastructure layer. With this new paradigm of work, we’ve definitely seen maintenance or acceleration of revenues in our own portfolio companies. Why is this happening? This is mostly due to an increase in software spend towards cloud, increased innovation and R&D spend, acceleration of digital transformation journeys, and more. You have entire executive teams and boards pushing for more digitization given the way we work has fundamentally changed. This new way of life requires new processes, systems, and approaches and most companies can’t sit back anymore and put the digital transformation agenda on the shelf for the next few years. You have seen this take shape through the entirety of the cloud movement of the past 10+ years but there is a serious amount of acceleration due to this pandemic.
Another interesting finding was that only 9% of the companies fundraising had 12 months or more of runway. Do you have any advice for founders who are currently raising on short runways?
That’s a tough one. I would probably say one main takeaway which is to parallel process an internal fundraise with your existing investors while also going out and looking at that new round of funding.
When looking at pitch decks during the current climate is there anything specific you want to see?
In terms of the actual review of the pitch decks there has not been much change from our standpoint. I’ll highlight a few areas we are spending a bit more time on though given the fully virtual environment we are currently in. First, we still want to see real students of an industry or the buyer persona. True knowledge of the problem and an exhaustive understanding of the solution and pain points (i.e. Centricity Insights or Transfix in our portfolio are great examples). That’s usually reflected in team slides or the problem/solution slides. Second, we generally are investing in companies that play into a technology replacement cycle (i.e. VNDLY in the contingent workforce space in our portfolio is a good example) so competitors matter a lot. Have you done the work to showcase that you really know these competitors beyond the basic 2×2 and does that come through in your slides? Third, we’re thinking a lot about bottoms up total sellable market opportunity especially given many of the business software grouping is replacing some form of labor, process, or existing system (i.e. Electric AI in our portfolio displacing MSPs is a good example). Do your go to market and revenue slides articulate clearly how you are thinking about this? Those are some examples of how we’re thinking a bit more critically about pitch decks.
Many founders we spoke with report that they’re sticking with their current valuations despite the economic changes. Are you seeing any major shifts in valuation?
I don’t think we have seen anything major just yet. There are two buckets of valuations that we think about. First, our initial investments. Second, our follow-on investments in companies we have already invested in. In terms of pricing for our initial investments, we haven’t seen a substantial change in pricing in most geographies we spend time in. There has been a slight decline, but it is not significant. That being said, I do predict that pricing is going to come down. On the follow-on investments side, things have been a mixed bag but relatively logical and predictable. Many of our companies that have played into the application software replacement cycle or are in an emerging category that is exciting are definitely reaping the valuation benefits. Those companies that are in sectors out of favor are having a tough time. Downstream investors remain cautious and relatively risk-off right now. However, the business software group of companies (especially the publicly traded ones) has endured and I do expect that multiples for our follow-on deals will return to that pricing environment.
Is there anything you think founders should be thinking about right now or anything you want to add?
A couple things. First, stay positive. I thrive on optimism and while the market is getting tougher to raise your round, I think being excited, enthusiastic, and confident can go a long way for your own mental health. Second, try harder in this environment to have a support network of entrepreneurs who can really help with fundraising, introductions, and more. It will really help. I’ll end on a high note. Third and especially if you are starting a b2b company, we are in one of the greatest cycles for software innovation we will ever know. Roughly $1T is going to change hands from an old generation of IT buyers to a new generation of IT buyers over the next 10-20 years. It is really powerful and the businesses we operate and invest in will fundamentally change the way things get done. That is super powerful and exciting.
DocSend Startup Index: Optimism is high, but runways are short
We surveyed 250 startup founders to learn how their businesses have been impacted by the COVID-19 pandemic. Here are the results and insights.
Planning your finances before raising a round
Most VCs are prepping their portfolio companies for 18-24 months of runway and will likely want to invest in a founder who has the same mentality.