COVID changes fundraising forever

At the beginning of 2020, Boulder-based medical technology company MBio Diagnostics was starting a round of fundraising that was supposed to close in March. The company had a convertible note and a lead investor, with another group of investors expressing interest.

Then the COVID-19 pandemic hit.

“We had this great story and business plan that was instantly obsolete,” said Nick Traggis, executive vice president of corporate development at MBio. “We had a plan that had nothing to do with public health needs around COVID. What we had to do was pivot and find out what we could do to be part of the solution.”

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Much of the capital about to be injected into MBio suddenly became unavailable as investors had to tend to their existing portfolios.

Over the first few months of the pandemic, MBio adapted its LightDeck rapid-diagnostics technology to test for COVID-19 antibodies and sought an emergency use authorization from the FDA to bring the test to market.

And the investors came back in greater numbers than before. MBio closed its equity funding round over the summer, with details yet to be announced.

“We had to pivot our business plan to complement the pandemic instead of ignore it,” Traggis said. “We were able to attract additional investor interest as we were able to pivot our business plan.”

In many ways, the wild ride of MBio’s latest funding round is indicative of the startup fundraising environment along the Front Range in the days of COVID-19. After Colorado startups raised $2.5 billion in 2019, 2020 began with companies raising nearly $120 million in January, nearly $180 million in February, and more than $200 million in March, according to Form D data.

In April and May, the market felt the effects of the pandemic — funding fell by nearly 75%. But since then, it has been largely business as usual. August saw the most fundraising by startups so far this year, with $209 million. And although fundraising has slowed compared to 2019, 2020 is still outpacing 2018, 2017, and 2016.

“I’ve been surprised at how little impact COVID has had on fundraising,” said Natty Zola, partner at investment firm Matchstick Ventures. “There was some blipping in March and April when VCs did internal triage with their existing portfolios. It’s probably a little bit harder to raise money, but I expected it to be much harder.”

Peter Adams, executive director of Rockies Venture Club, said the environment in 2020 is different from previous economic recessions in 2000 and 2008.

“[Angel investors and venture capitalists] clammed up,” Adams said. “There’s something different about this from an investment point of view.”

Adams’ fund, Rockies Venture Club, just completed its 20th investment of the year, he said. The fund usually makes about 25 investments annually, and is on track to eclipse that this year.

Why has fundraising in Colorado not taken as big a hit as many expected? The unprecedented nature of the COVID-19 pandemic has certainly played a role.

“The pandemic has disrupted every aspect of our lives,” Adams said. “All of these cracks that the pandemic has created are creating opportunities.”

Those opportunities are in sectors such as medical technology, as companies such as MBio have been able to adapt their products to the moment. Good opportunities also exist in education technology, cybersecurity and communications, Adams said.

Zola agreed.

“Software is still critical for businesses, consumers, medical facilities, staying in contact with friends and family, etc.,” he said. “The software VC market has realized this is an amazing period of innovation in spite of all the tragedy and sadness around it. That’s made investors be excited to continue investing.”

What has changed most about startup investing in Colorado during the pandemic is how a process formerly driven almost entirely by in-person interactions has become totally virtual. For investors, this makes it harder to conduct due diligence.

Mike Freeman, CEO of incubator Innosphere, said his team has built a new virtual due-diligence process from scratch. Innosphere has halted all in-person meetings and likely won’t resume them until the first or second quarter of 2021. Freeman said that policy is important, because founders may feel pressured to meet in-person if they have the option, even if they’re uncomfortable with doing so. He wanted that pressure gone.

But that raises additional challenges.

“It’s hard to get a sense for people and for a team when you can’t meet,” Freeman said.

Not only can virtual meetings make it harder to build a relationship with people, but it can also make it more difficult for investors to pick up on potential red flags, such as conflicts between co-founders.

“It has changed our thinking somewhat because we’ve only pushed through companies that we interacted with before COVID,” Freeman said. “It’s easier to do due diligence with companies we already knew in the past or who had good referrals. It’s really hard.”

Those difficulties extend to the companies, too. Traggis, the executive vice president of corporate development at MBio, said he had to re-learn how to read body language through a screen.

Companies have also had to cast much wider nets to catch investors. Abb Kapoor, co-founder of Denver-based financial health software company Curu, said the company had to triple its pipeline of potential investors from previous rounds for the funding it conducted during the pandemic.

Curu completed a $3 million funding round in May, the company’s third. It had signed its term sheet in March, “two weeks before the world melted,” Kapoor said. For Curu, a virtual funding round was completely new.

“Every founder’s process is different,” Kapoor said. “Ours is relationship-based. It’s so much easier to build a relationship over just one cup of coffee.”

For all the challenges, investors and founders meeting virtually has had some benefits. If you don’t have to meet in-person, it can be easier to connect with someone across the country or the world.

“The geographic boundaries for investing are starting to melt away,” Zola said. “The geographic distribution of portfolios will be much greater because of COVID.”

Indeed, during its funding round in the middle of the pandemic, Curu secured capital from investors the founders never met, including one in New York.

Investors and founders expect this to be the paradigm for the foreseeable future. Plenty of capital is out there, but founders have to find newer, more creative ways of securing it. Investors have to mind their existing portfolios and pick new companies that can adapt in an unpredictable environment.

“I can’t imagine going back to the way we were,” Adams said.

Said Freeman: “I’m optimistic about 2021. I think there will be a lot of demand. The advice I’m giving founders is that it’s not the end of the world. 2008 wasn’t the end of the world. The reality is there is a lot of capital out there and the founders will have to work harder than ever to fundraise. If you’re not really aware of that you may get tripped up.”

Kapoor concurred, saying that founders should not be discouraged, but lean on existing relationships to provide warm introductions rather than relying on cold calls and emails.

But, Adams said, the disruptions of the pandemic should also be a wake-up call for investors and founders to be prepared for the worst — and that they shouldn’t dismiss COVID-19 as a once-in-a-century anomaly.

“The thing that’s scary, and most people don’t get this,” Adams said, “is that it won’t be 100 years until the next pandemic. It could be two years. Once we have this vaccine, we’ll still have a gun to our head.”