Follow the money

Economists are currently trying to determine the shape of the global economy’s exit from the slump caused by the lockdown due to the pandemic — whether the path to the “new normal” will resemble the letter “U” or “V”. Various institutions, consulting firms and industry associations are trying to identify the sectors that will rebound from the shock the fastest and will be able to benefit from the post-pandemic economy. Meanwhile, business angels and venture capital fund (VC) managers are investing money in selected start-ups. They are guided by their own experience, as well as the opinions of experts. “Since the beginning of the crisis, we have been incredibly busy,” said Jan Hammer, a partner at Index Ventures, in an interview with the Financial Times. He added that managers were devoting all of their time to entrepreneurs and were available 24 hours a day, 7 days a week.

The pandemic changed relatively little in the value of investments pursued by VCs in the United States and Europe in the Q1’20 compared with the same period of last year. However, significant declines occurred in Asia, which was the first region affected by the COVID-19 pandemic.

According to data contained in the report entitled “MoneyTree Report Q1 2020”, published by PwC and CB Insights, in the first three months of the year VCs invested a total of nearly USD51bn in start-ups, that is approximately 10 per cent less than the year before. This decline was primarily due to changes occurring in Asia, where the value of investments decreased by 20 per cent, to USD16bn.

The number of transactions in North America decreased by 17 per cent. This decline was consistent with a broader trend observed over the past year, but there was a sharp decrease in the number of transactions involving start-ups at the seed stage. In Asia, the number of transactions decreased by more than 20 per cent, and in Europe by 10 per cent. The research firm CB Insights stated in the comments on the report that “the true picture of VC investment activity in America and Europe will be seen in the Q2’20, and the Asian experience may indicate what will happen”.

Based on the experiences of the 2007-2009 crisis, it can be expected that the decrease in investments will primarily affect start-ups in the early stages of development — the seed stage and the so-called series A and B funding rounds — while the selection of candidates for financing will be much more stringent than in recent years. The number of investors will also decrease. Such activities will be suspended — at least temporarily — by the asset management companies, which have thus far been seeking profits by participating in the late stages of financing (series C funding rounds and beyond).

“COVID-19 has put a sudden halt on fast money and ‘FOMO’ investing, forcing the VC industry to slow down, resist the inclination to follow the crowd, and refocus on more robust due diligence and analysis. Thesis-driven investors will be able to take the time to spend a month or two (or three) to really get to know the team, understand the business model, capital structure, and the market before closing a deal,” says Sean Park, the chief investment officer and co-founder of Anthemis Group, a VC fund management company operating since 2008.

Interesting observations were made in the first weeks of economic shutdown in the United Kingdom. Between March and April 2020, a total of GBP663m (USD825mn) was invested in start-ups (34 per cent more than the same time last year). The investors decided to provide additional funds to the investments which were the most promising in their opinion. The financed start-ups primarily included fintech companies, companies exploring the practical applications of artificial intelligence and blockchain technologies, as well as entities operating in the field of cybersecurity. Among the companies that raised new funds, there were relatively few entities that received financing for the first time.

Some start-ups are not doing well

We should keep in mind that the decision-making processes related to the funding rounds completed in recent weeks and months began before the outbreak of the pandemic. However, the finalization of the funding rounds, in the case of transactions completed in March, April and May, means that the VC managers see the potential of these companies in the post-pandemic economy. If this had not been the case, the negotiations would have been suspended or terminated.

According to global research conducted in March and April by the company Start-up Genome, among the start-ups that sought financing before the pandemic and agreed on its conditions with the investors, approximately 28 per cent were not able to secure the funds in the end. A further 44 per cent of start-ups indicated in the study that the process of raising funds slowed down.

The group of start-ups which suffered after investors suspended talks on the next round of funding includes, among others, the company Booksy, which originates from Poland. “In March, everyone said: We like Booksy, but we’ll have to see how the shutdown of services will affect the industry and the company itself,” said Stefan Batory, the president and co-founder of the start-up.

The company, which operates in the United States, United Kingdom, and also in Poland, offers an application that enables customers to book a visit, among others, in hair and beauty salons. It also provides a platform for the owners of such establishments that allows them to manage their bookings, deliveries and billings. In the three previous rounds of financing the company raised almost USD50m. In order to survive, it has to dramatically cut its costs, laying off 150 workers, including dozens in Poland. “There is no guarantee that the company will be able to conduct another round of funding in the next year or two. Until the situation in the global economy stabilizes, access to the capital markets will be limited,” admitted Stefan Batory.

And some are doing quite well

The funding constraints mentioned by Batory have not affected start-ups such as: BioCatch, Awak Security, Brain Box, Codota, Edited, FarEye, ForgeRock, Granulate, Rome Therapeutics, H1 and Kebotix. Their names don’t mean much to the broader public, but they all have one thing in common: the use of artificial intelligence technologies in various areas of activity. According to data presented by CB Insight, in the first quarter of this year start-ups involved in artificial intelligence (AI) technologies raised a total of USD8.4bn.

Kebotix (it raised USD11.5m in series A round) is actively pursuing the use of AI and robotics in processes related to the development of new chemicals. Brainbox AI uses artificial intelligence technologies to optimize the operation of heating, ventilation, and air conditioning (HVAC) systems (it raised USD8.6m in series A round). FarEye, whose clients include Domino’s, Walmart, Amway, 7-Eleven, DHL, and Lithuania Post, raised USD25m in series D round. This start-up uses AI in logistics. It organizes and tracks logistics operations with automatic shipments and allocation of orders, electronic confirmation of deliveries, predictions of delays, as well as the optimization of delivery routes, which reduces route length and increases fleet efficiency. All of this is done based on factors such as traffic, weather, and detours.

VCs also invested in start-ups applying AI in the area of cybersecurity. ForgeRock, which built an artificial intelligence-based digital access and identification management system used by companies such as Philips, BBC, BMW, and Deloitte, raised nearly USD100m in series E round. Smaller amounts of financing were obtained by Awake Security, which uses AI technologies to identify unusual network activity and to detect cyberthreats on this basis (the company raised USD36m in series C funding round), and by Randori, which has harnessed AI and machine learning technologies in solutions used to protect against cyberattacks, including attacks on Internet-of-Things (IoT) devices (the company raised USD20m in series A round).

Fintech companies using AI technologies also obtained new funding over the past months. Everee, which offers payroll management systems for companies, finalized series A round worth USD10m in the second half of April. An advantage of its systems is their flexibility, which allows an employee to choose whether they prefer to receive their payment on a daily or weekly basis, as well as in advance or in arrears, with no effect on the liquidity of the company utilizing this solution. The same amount was raised by Bodhal, which uses AI to optimize the expenditures incurred by companies on legal services.

Fintech companies, like the AI start-ups, already recorded a growing inflow of funds in the past year. The pandemic has only accelerated this trend, as consumers and businesses are now looking for contactless payment methods and new ways of using financial services, which do not require a visit at the bank branches or brokerage offices.

According to PitchBook, a company that specializes in collecting data on enterprises, in the Q1’20 North American and European fintech companies raised USD2bn (the funding raised in the whole of 2019 was USD5.2bn), which is more than in all of 2015 and 2016. The Q2 could be just as good as the first one, among other things, thanks to the so-called mega-rounds or rounds of funding worth at least USD100m.

In May, Robinhood Markets, which offers online brokerage services, raised USD280m in series F funding round, while the company’s valuation reached USD8.3bn. Also in May, the online bank N26 raised an additional USD100m as part of series D round. In April, the company Stripe, whose solutions enable businesses to receive online payments and to issue invoices to customers, raised USD600m in series G round, while the company’s valuation reached USD36bn.

In April, money from the investors also flowed to start-ups improving co-working and remote work solutions, such as Slite, which is developing document sharing solutions. EnginZyme is an interesting example of a company that raised financing in series A round during the pandemic. This start-up is developing technologies enabling the production of environmentally friendly materials that could provide a cost-efficient alternative to rubber or plastics such as nylon.

The pandemic did not stop the funding rounds of start-ups operating in the broadly defined medical industry. Vida Health raised USD25m in series D round for the development of a platform that allows chronically ill people to remotely contact their nurses, trainers, therapists, and nutritionists. Robocath, a start-up working on robots used in vascular surgery, raised USD43m in series C round. The company Compass Pathways, which focuses on the treatment of depression, raised USD80m in series B round, while Erasca, a company that works on anti-cancer therapies utilizing AI, raised up to USD200m in series B round.

Start-ups operating in other areas were also able to raise funds. Vast Data raised USD100m in series C round, while its valuation reached USD1.2bn, which is three times more than in February 2019 during the previous round of financing. The company is involved in the development of high-speed data storage systems used by both companies and scientists for artificial intelligence solutions and machine learning process.

Many commentators believe that the drops in oil prices could delay mass-scale introduction of electric vehicles to the market. Despite this, the company FreeWire, which developed an ultra-fast battery charging technology using mobile charging stations, did not have any problem with raising USD25m in series B round. Meanwhile, Amply Power, which specializes in solutions used in the charging of batteries in fleets of electric buses, trucks, and passenger vehicles, raised USD13.2m in series A round.

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