‘Back in business’: Startup funding adjusts, rebounds amid pandemic

The pandemic has been a tumultuous time for many. Stock markets have been volatile, unemployment skyrocketed, and lots of industries face a long and uncertain road to recovery.

That doesn’t sound like a world where investors would be keen to throw their money around, but the turnaround for early-stage funders was faster than many anticipated.

“The industry kind of shut down for two to three months after the middle of March,” said Brian Matthews, co-founder and managing partner of Cultivation Capital, a St. Louis-based venture capital firm. “We just decided as a firm to put everything on hold and see how bad this was going to be.”

After about 90 days, Matthews said, the firm resumed business as usual.

“Since July, we’ve been back in business,” he said. “I don’t think it’s much slower.”

Hear more: The Speaking Startup podcast looks at early-stage funding during the pandemic.

It appears that’s an approach many firms took. Startups in 2020 outraised the amount generated in 2019 by 4%, according to Crunchbase’s Global VC Report. More than 90% of venture capital firms expect to come out of the pandemic fine, and to continue investing in new ventures, according to a survey led by Paul Gompers, a Harvard Business School professor.

That’s because technology has made it easy to continue connecting with startups, according to Matthews.

“We have learned we can do all of this online,” he said. “And, you know, we kind of laugh and say, we’re probably more efficient, because we’re not doing small talk and our meetings and that sort of thing. So I would say it’s, it’s back to normal, and we’re just as doing just as many deals as we were pre-COVID at this point.”

Of course, that doesn’t mean the industry hasn’t changed at all.

“We would never do a deal until we look them in the eye. And certainly, post-COVID, that isn’t true,” Matthews said. “We’ve done lots of deals where we look them in the eye over Zoom.”

But this technological shift could actually be a good thing for many startups. Brian Whorley founded Paytient, a company that allows people to pay for their medical bills over time, in 2018 in Columbia. He said that initially, it was a challenge to raise large amounts of venture capital in the Midwest.

“One hundred percent, nearly, of the money that we raised prior (to the pandemic) was in person, he said. “I remember, in June of 2019, when we first went out, it was very difficult to raise money from Columbia, Missouri.”

Whorley said he got a great offer from an investor based in San Francisco during the startup’s initial funding round that year, but it would have required Paytient to move its operations. Whorely didn’t want to do that, so he didn’t take the offer.

But now that the pandemic has forced so much of working and investing online, it has lessened those kinds of location-related demands.

“This most recent round that we raised, you know, everybody’s working remote and being remote,” Whorley said. “It’s leveled the playing field. It’s like, everybody’s working from everywhere.”

Matthews agrees. He said that no firm has a particular advantage over others when it comes to speaking with investors online.

“Everybody’s playing the same game, at this point. Maybe if the company’s in your town, you’ll spend some time with them face to face, in a socially distanced way,” Matthews said. “But, for the most part, everybody’s gone virtual, all the firms are working the same way.”

Matthews said COVID-19 has impacted the investing world positively in other ways. The pandemic has actually provided a valuable test for investors like him to evaluate companies.

“The really strong founders did an amazing job and, you know, adapted, made changes and came out of it stronger than ever,” he said. “Because some of their competitors, in whatever industry they were in, didn’t react as strongly, and so they were able to take more market share.”

Maybe it shouldn’t come as a surprise that in the startup world, which puts a premium on pivots and changes, investing has bounced back quickly. Going forward, Whorley said raising funding could become easier for companies located outside of major startup hubs.

“I think you’ll see more people being able to work remote, and start companies,” Whorley said. “I do think that this has kind of lowered the peaks and raised the valleys in terms of being able to sort of put, you know, Columbia, Missouri, as a viable place to build a big and important company.”

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