How is N49P investing differently now?

Originally published on N49P website

Ever since the vast majority of the world population was forced to shelter in place founders have been asking whether or not VCs are investing and if so what has changed. VCs continue to invest but at a slightly slower pace and most likely with a different view of the world. Each VC firm views the world differently depending on their thesis and stage of investment. The following is how we, an early stage venture capital firm focused on Canadian start-ups and Canadian founders, have adjusted our approach.

Valuation, runway, and round commitment

Valuation, runway, and round commitment are related as have a large impact on the dilution founders take in a fund raise and when they can have confidence a round can close. Our approach to all three have changed:

  • Increased runway: We now want to see the current funding to provide a minimum of 24 months runway post close. We used to be fine with 15 to 18 months but with the uncertainty brought on by the current pandemic, in the economy and in the upcoming US elections we believe it will be a difficult fundraising environment for at least the next 12 to 18 months.

  • Round commitment: Our investment typically account for 20% to 50% of a round. Historically when we have conviction we would be willing to sign a SAFE and wire the funds confident that the round will eventually be filled even if it took slightly longer than expected. In the current environment we have seen other funders back out and many sources of capital evaporate. We will now require a minimum amount raised prior to wiring funds. As always, we will lean in and help the founders close the round.

  • Valuation: Valuations have started to fall and will most likely to continue to fall for the next several months. This is function of increased risk and lower market comparables.

Market segments

Our approach is the same as prior to the current situation, we want founders who have a unique insight into a growing market with favorable trends.

Over the past three months consumers and businesses behavior has changed drastically. The difficulty is determining which of these changes will continue at the same pace post COVID and which ones have accelerated a trend and captured several years of growth. For example distributed and remote teams was a growing trend prior to COVID. COVID has accelerated this trend and more companies will embrace this trend post COVID. The question is has this captured a few years of growth in several months and will we see a slow down in this trend and plateau post COVID or we will see growth from this higher plateau? The same questions can be asked of industries negatively impacted by COVID. How long will it take for air travel to return and what will be different?

How do we deal with this uncertainty? Two ways: (1) Higher uncertainty results in lower valuations and (2) the data or insights founders have in certain industries that we required is higher than we previously needed for the industries with the most uncertainty (e.g. commercial proptech)

Team

Fundamentally we look for the same characteristics in a team that we always have: founder/market fit, tenacity, quick learners, a track record of success, ability to learn and confidence to execute.

What has changed? We spend more time learning how the team will build a culture and sense of camaraderie remotely.

Are we still writing cheques?

Despite the market environment we are still looking at companies and investing. In fact, we will be announcing a couple of new investments shortly.