After ten years of rising US equities prices, many investors are selling (albeit off the highs) but with large capital gains. This sell-off gives investors a chance to rethink their allocation and potentially focus on private investments in earlier stage companies as a long-term hedge. Anecdotally, I met with hundreds investors over the past 24 months and smaller/private deals were more difficult in an era of seemingly predictable source of 8% plus returns in the public markets.
So what is the case for investing in technology at the earliest stage besides the fact that returns are the best and investors are seeking a long term game now?
1. Understand the investor type and hypothesis and craft your pitch in response to their view of the world. A high net worth investor who is an angel, likely has public market exposure, capital gains and a fairly large amount of ongoing hypothesis. Take the opportunity to remind your potential angel investors that this is a great time to move investment dollars out of the volatile public markets and into a business that is values-aligned and run by someone they know and trust. Angel investing has generated good returns over time for angels. Even though this a dense academic paper, I recommend getting comfortable with this analysis so you can understand how your potential angels are thinking about this investment https://willamette.edu/~wiltbank/jbv_angels_2009.html
2. Early stage pre-revenue tech startups become in relative terms less risky. At the early stage, risk doesn’t change much in absolute terms but changes dramatically in relative terms. If you at normal times evaluate a pre-seed startup risk to be, say, 100x higher than that of a later-stage company, at the time of crisis this could become only 20x. this of course assumes the crisis is bounded in time.
3. Pre-revenue startups have zero exposure to market, and generally benefit from crises, because they can get cheaper workforce (this assumes employees will still want to join a company with financing risk). If you expect the crisis will take x number of months, and the startup has >x runway, you know it will survive. There are almost no other variables except in the Coronavirus instance, we don’t know x number of months yet.
There’s always capital for companies that have the product market fit and a strong relationship with a diversified set of customers. Companies should rework their financial models and capital strategy to ensure they can hold-off on deploying capital until they understand business drivers that enable them to become category-owning companies offering a defensible product or service. If you are able to organize your company to qualify for opportunity zone funding, that could help your potential investor with the capital gains associated with their most recent public company stock sale.