Here’s how an industry pro is running the ruler over post-pandemic startup investments
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The COVID-19 pandemic has caused plenty of disruption to the listed space, but equally so for startups and private companies.
The broader environment hasn’t been easy for deal-flow and capital investment for a lot of early stage businesses.
At the same time, one industry source told Stockhead that the quiet period stemming from the peak of the crisis in March had provided the opportunity to schedule meetings with prospective customers who otherwise would have been too busy.
To get the investor view, Stockhead caught up last week with Daniel Veytsblit, director at early-stage investment firm Investible.
And while the phrase ‘cash is king’ is most commonly applied to early-stage ventures, Veytsblit said that concept had taken on increased importance in the post-pandemic environment.
Prior to making an investment, the fund’s investment committee typically looks for evidence of a 12-month “cash runway” — detailed budgets which prove a startup can maintain short-term liquidity. But looking ahead, Investible wants to see that extended before providing capital.
“We want them to have 18 months plus of cash runway,” Veytsblit said. “That’s longer than normal, but it comes down to the relative period of uncertainty over the next six to 12 months in terms of how the markets react, for both B2B and B2C models.”
In view of that, Veytsblit said Investible was “particularly cognisant” of how companies were calculating their financial projections over that period.
“I think most startups are pretty optimistic around revenue ramps and growth, especially once they get (prospective) funding,” he said.
Projects which show a “huge ramp” over the next six to 12 months are a red flag, as are businesses that are reliant on additional revenue streams to cover their cash requirements in that period.
“In this environment it’s to grow a little bit slower in many sectors. But as long as you can survive and maintain some traction, and have the cash runway to thrive thereafter once you know what new normal is, that’s the important bit,” he said.
Investible’s portfolio approach to startup investing has seen it take stakes in more 40 early-stage businesses which meet its investment criteria.
While it’s been more discerning about allocating capital in the current environment, Veytsblit said some companies the fund worked with had been able to pivot to take advantage on unexpected opportunities.
He highlighted the example of Manettas Seafood Markets, which runs a customised seafood delivery business in Sydney and the NSW Central Coast.
Previously, the company derived most of its revenues from B2B channels delivering to food restaurants and wholesalers. But in the wake of COVID-19, it’s expanded its distribution network to include home deliveries, with an expanded product offering.
“Now they deliver a number of product categories (along with seafood) direct to the consumer, and there’s been significant appetite for that,” Veytsblit said.
“When shortages peaked in March, they were the only distributor that was able to get some products to the customer’s door because they already had the agreement with suppliers.”
While the early-stage investment environment is facing some challenges, Veytsblit noted that the longer-term investment horizons associated with startup capital could be favourable in the event of sharp disruptions.
“We typically invest for five to seven years, so it’s less about timing the market and more about looking at long-term trends,” he said.
“You obviously don’t want to be too early or too late but the framework is on a multi-year timeframe rather than 12 months or say, quarterly earnings from March to June.”