How Startups Can Raise Venture Capital in a Virtual World

In 2020, investors flocked to companies with a track record of success – but were slower to open their wallets to earlier stage startups. Between January and November, 69% of U.S. deal value went to late-stage deals. Although venture funding was up 4% worldwide, according to the Global VC Report, early-stage companies still ended 2020 down 11% year over year.

Theoretically, 2020 might have been a banner year for startups. The shift to virtual, one may have argued, could have increased the odds of startups in far-flung places getting meetings with venture capital (VC) firms that previously would have snubbed them for geographic reasons. Proximity didn’t matter anymore. So why couldn’t startups capitalize?  

Raising money in 2020 was more difficult than ever

It may seem counterintuitive, but in a year filled with online pitch meetings, the most successful early startups had a decidedly offline advantage: their networks.

A VC firm’s raison d’etre is profiling risk precisely enough to determine whether an investment has a probable chance of achieving a desirable ROI, and much of this decision-making process requires VCs to truly get to know the founders. This is exponentially more difficult in a virtual setting. Meeting someone face-to-face adds dimension to risk profiling. A VC can look founders in the eyes and get a feel for who they are, what drives them and whether they’re willing to go all the way to protect an investment.

In 2020, the dearth of in-person events made this kind of relationship building nearly impossible. As a result, a founder’s pre-Covid network became the currency on which, in many cases, the business lived or died.

Referrals became exponentially more important

Referrals and other tools that help establish the credibility of a founder have always been part of the VC world, but in 2020 they were more important than ever. Founders who came to the table with a person or institution backing them were automatically a step ahead of the competition.

StackStr, an AI technology startup participating in Georgia Tech’s CREATE-X Launch accelerator, offers a case in point. Dustin McAllister, the co-founder, participated in more than 50 pitch meetings in less than two weeks, jumping from sessions with West Coast VC firms to meetings with Atlanta-based investors. In the end, it wasn’t a Zoom meeting with strangers that paid off, but a referral made by a co-founder of CREATE-X. Thanks to the introduction, Dustin forged a close relationship with Andrew Dorman, a partner at Knoll Ventures, and closed a seed round in November.

Advice for startups in a virtual world

If the traditional mechanism for raising capital used to be attending as many face-to-face meetings as possible – and then 2020 was 100% virtual – 2021 may see a swing back to a hybrid model. Many VC firms found the virtual alternative cheaper to execute and easier to accommodate more meetings per day, even if it disadvantaged some startups. Getting back to the old normal may never happen.

Beyond joining an accelerator or finding creative ways to network, founders must adapt to the new normal and find creative ways to build investor confidence. Here are a few strategies to consider.

1. Enhanced metrics. VCs have begun expecting enhanced metrics to compensate for the virtual vetting process. Startups should reevaluate what they’re presenting to investors in the seed and subsequent rounds based on these new expectations.

A few years ago, for example, VCs might have been willing to invest in a company with a few pilot tests. In the past year, that standard notched higher. Now they might need to see actual paying customers and a certain amount of recurring revenue. Push yourself to a higher standard and you’ll position yourself for success.

• Increased attention to organization. You can make up for a certain level of unpreparedness when you’re meeting in person. Now, there’s no excuse. Founders must think through and create plans for all possible scenarios, anticipating questions about specific financials and considering what an investor might need as follow-up material. One tactic is to create a digital lock box with all relevant documents so you can send a follow-up note and file link the minute you “leave” a meeting.  

• Who, what and where. Address who you are, what your business is about and where it’s going. The goal is to include things that make the VC more comfortable with you and your business style. Anecdotal stories don’t happen as organically during virtual meetings, so you’ll have to be more purposeful about getting those points across.

To help founders understand the value of humanizing themselves and their business, I often tell young entrepreneurs about an exchange that occurred when I was raising capital. I handed my business card – which I had made from a free online template – to a potential investor. The investor asked why I had chosen the free business card option rather than spending a little bit of money on something more substantial. My decision told him a lot about who I was and the value I placed on a dollar, which the investor found encouraging. That kind of serendipitous side conversation is much more difficult now, so founders have to find a way to get points like this across in a virtual setting.

Looking ahead

There are profound advantages to raising capital in a digital world. Founders can cast a wider net and VCs are getting more comfortable providing funds to companies that aren’t based in their city or state. Over time, this transition will lead to a freer flow of capital that is less geographically concentrated. But we’re in the early stages of that transition.

Founders can benefit from this new model if they successfully navigate the new normal. A founder’s network – including all the connections he or she makes at an accelerator – will remain the single best way to build fruitful VC relationships, but other factors are also rising in importance. At CREATE-X, we’re helping to connect students with VC funds more often than ever, while also encouraging founders to focus on other business fundamentals that will help them meet rising expectations in a changing fundraising world.