Fast Five: Answers to Covid Funding Fears

The Venture landscape is trickier than ever for Music Tech companies to traverse. Here

are answers to 5 of the top funding concerns to help you on your pandemic-era raise.

TL;DR Firms are still investing, though at slower rates and for less money than before Covid. Risk outweighs reward for most music platforms at the moment, but if you are or can pivot to a purely online moneymaking model, especially for B2C users (e.g. livestreaming or virtual mastering), you might have a hit on your hands.

The Macro Situation: What You Need to Know

The pandemic and its ensuing recession have been difficult for everyone (no duh, right?). For us it’s been a time of Geller-level pivoting, delayed fundraising, and strategic restructuring. And it's not just startups. Incumbents are hurting too; the industry as a whole has slowed, from research to releases, not to mention the decimation of the live sector, which was on track to hit almost $29 billion by 2023. Certainly the business world at-large is facing a landscape unprecedented in this generation: last month the Dow Jones had its worst day in history due to fears surrounding Covid. That’s a big deal when you realize that for the past decade (since the end of the Great Recession) the market has been its most bullish ever.

This is primarily relevant because the venture landscape has mirrored this aggressive activity and grew almost five times, reaching a $140 billion fever pitch. But despite the growth and general resilience of the market during recessions, Covid-19 has caused venture activity to drop by almost 20%. Why is this important? Because emerging tech — like music, audio, and AR/VR platforms — are some of the most vulnerable to that drop. Why? Primarily due to the relatively niche positioning of these companies within the larger venture ecosystem, and the general lack of widespread knowledge and data that prove their viability as they emerge.

In speaking to other music tech entrepreneurs this deceleration is, somewhat comfortingly, a common theme. But there are still a lot of active investors like Connect, Panache, or Union Square who are courageously navigating this decidedly un-brave new world. Raising early-stage capital has been vital to our success, and since like most startups we have about two years' worth of operating capital on hand, and with a 2-year outlook on the economic recovery from Covid, I thought it was important to understand how investors in relatively niche yet emerging areas like music tech are evaluating new investments at a time when preserving capital is so vital.

I talked with some of my peers to hear their perspectives, questions, and worries about funding mid-Covid and have offered my observations on the five most common topics below.

So, are firms currently investing at all?

Yes, they are. Most are adjusting the amount of capital they keep in reserve for startups already in their portfolios, but many are closing new deals as well. Venture as an asset class is more resilient than the stock market so it’s not as mercurial or reactive, but it’s important to know if your target firms still have investable capital, and to understand where they’re at in their funding cycles.

What's the division between new investment and active maintenance like?

It seems to be about 3:1, with most firms reserving 60-70% to prioritize portfolio companies. For those existing investments most at risk capital reserves are vital for triaging and follow-on funding. New deal flow is secondary and more selective than usual so expect fewer deals completed than planned, and for less money than founders may expect. Industry-facing startups are tougher to sell; they're on tighter-than-ever budgets, but they also have more time to try new platforms and seek solutions to problems exacerbated by the pandemic.

You're thinking "we can probably pivot." So what emerging tech is the most — or least — viable during the pandemic?

Not surprisingly, solutions that shift and increase interaction online and make connectivity easier are top priority. Collaboration tools, AI-driven software, and some AR/VR applications are the most attractive. Software that focuses on live entertainment or events in general are in limbo at the moment, except maybe livestreaming platforms. Given the uncertainty as to how long recovery will take, firms won’t want to fund companies that are experiencing extreme burn if there's no meaningful revenue in the near (12-18 months) future.

I don't know if we can restructure that drastically. Should we rethink our pitch strategy?

In a word, yup. Changing the vibe and structure of our deck opened many more doors than we were expecting. We focused B2B messaging on maintenance and classification rather than active discovery, and engaged B2C users from an artist connection angle. Your pitch should show that your tech is mission-critical to users on either side of the B2B2C equation, at the very least righting the ship while weathering the storm. In other words, painkillers, not vitamins. It should also reflect your own capital retention strategy; revenue is a relative unknown right now, but OpEx is precise and most importantly malleable. Communicate how intentional — and how tight — your bootstrapping is.

Instead of pivoting or trying to raise in this climate, should I be angling for an acquisition?

The dream, right?! And to be honest, it’s a good time for major players in the ecosystem to both invest and/or acquire; who doesn’t love a good discount? The ecosystem was already on the brink of a valuation balloon pop, and that combined with Covid will bring a natural decrease in competitive deals. But it’s hard enough to get acquired in a normal startup market, let alone one negotiating a pandemic. So rather than focusing on trying to cash in and bail out, why not make yourself a great case for any investor? Show that you can make hard decisions, navigate murky waters, and most importantly continue to grow in some way. In decreasing OpEx 24%, which cost us little more than an office, operational ease, and demanded a far more specific ad strategy, we were able to reprioritize capital, grow our user base, and retain all our staff.

The Final Word

The moral of the story is one that I think we all knew or at least intuited to some extent: times are tough for the world so they're tougher than ever for startups. And while the answers above aren't rocket science, I do hope they provide some unique insight and maybe even a little bit of hope. There's a light at the end of this weird, masked, socially distant tunnel and I'm confident that at its end our industry will take it, put it on a rig, and use it for a helluva comeback concert.