It’s hard to look back at events that happened before the Covid-19 outbreak hit the U.S. without feeling the sense that they took place in an entirely different historical era. “Social distancing” was a phrase almost unheard of; American passports still provided entry into most countries; almost nobody wore masks; and meetings like MedCity INVEST took place in hotel ballrooms rather than online. So naturally, the way startups raise money has also changed drastically.
The pandemic and need for social distancing has created numerous challenges both for startups and the financial firms that invest in them. In-person meetings between executive teams and venture capitalists, traditionally a key component of the fundraising process, are all but impossible, while some startups have had to reduce their activities.
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“I like to say that in-person meetings are so critically important in the absence of a long-term relationship,” said Deborah Kilpatrick, CEO of Evidation Health, a health data startup in San Mateo, California, that closed a $45 million Series D funding round at the beginning of the month, in a phone interview. “That still is the same, especially if you’re about to invest tens of millions of dollars into a company, you want to have a sense of the person who’s running the company.”
Fortunately, Kilpatrick said, lead investor B Capital was an insider, and while participating investors McKesson Ventures and Section 32 were new, they had existing relationships with Evidation. While the fundraising was already underway in the fourth quarter of 2019, and the company had already entertained verbal offers and accepted a term sheet proposal, the definitive diligence happened right in the middle of the pandemic. The company timed its announcement for when the Series D had been closed and it had appointed Sam Marwaha as chief commercial officer so that both could happen at the same time, but also because it did not want to make it in the middle of the pandemic, when things were shutting down and people were losing jobs.
Another company that announced a new round recently was San Jose, California-based digital health startup BrightInsight, which announced the closure of a $40 million Series B funding on June 23. Venture capital and private equity firm Insight Partners led the round, while investors from its Series A round participated.
In a phone interview, BrightInsight CEO Kal Patel said that on the one hand, Covid-19 has been a tailwind for digital health, as evidenced by the level of funding companies involved in it are receiving. At the same time, there has been a bifurcation of investors into one group that are interested in shoring up their portfolios to ensure survival and those that are genuinely open for business, which he and his colleagues have learned to distinguish by figuring out how committed they are to making investments. This meant asking investors if they were actively seeking new investments and whether they had any term sheets or active diligence in companies they had not already invested in and figuring out the path to actually closing a deal.
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“So we learned to ask those questions to separate out those investors who were able and committed to making new investments, versus the folks who want to keep the network going, but are probably not able to move in the timeline we had in mind,” Patel said.
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