Attracting Investment in a Post-COVID Environment


Although the coronavirus pandemic continues to strongly impact the economy, the transition into Phase 2 of B.C.’s Restart Plan does have many businesses looking forward. The economic environment, however, especially in the short-term, will not be the same as it was in January or February of this year.

For many technology and emerging companies, this means reassessing your strategy and making the necessary changes to adapt to the new normal. While every company’s situation is unique, and specific plans should be discussed with and vetted by a company’s financial and legal advisors, the following themes appear to be consistent in terms of considerations for technology and emerging companies to assist with attracting investment during this transition.

  1. Time: Both finding investors and going through an investment round or an exit transaction will likely take materially more time than in the pre-coronavirus era. Companies should assume that investors will be less risk averse, and will want look more closely into a company during due diligence, including its management team, past performance, budgets, and forecasts. Traditionally, prior to making an investment, it would have been common for an investor to, on multiple occasions, meet with the founders and visit the site, which will obviously be more difficult in a movement-restricted world. Not only should technology and emerging companies be prepared for this additional scrutiny, but they should also ensure their financial forecasts contemplate that existing cash flow may need to keep the company afloat for longer than previously anticipated.
  1. Planning and Flexibility: The ability to adopt and be flexible will be a key asset for emerging companies moving forward. Whether it be slightly changing the product to target a different market or industry, or revising forecasts and budgets to take into consideration new economic factors, companies that can demonstrate the ability to strategically and thoughtfully adapt are a more attractive investment target in this environment. In some specific situations, a long-term contract that hinders this agility may not viewed as an asset, and companies may need to offer free trials or free services to entice customers who do not currently have available cash flow to pay for new services. From an investor’s perspective, if a company has given thought to various scenarios that may play out in the next six to twelve months and developed mitigation strategies in anticipation thereof, that may provide more confidence in the company being an investment target.
  1. Cost Structure: Because of the scarcity of investment funds and the need for those who invest in companies to be mindful of the returns for their investors, the cost structure of investment targets is becoming increasingly scrutinized. Investors are looking for companies that can demonstrate a strong control of their costs, and will have a long-run way with any funds that are invested without the need for further funding and potential dilution. Founders should have a very good understanding of their cost structure and metrics, and be ready to explain any anomalies and discuss alternative opportunities that are presented by an analysis of the company’s cost structure.
  1. Documentation: If your company is currently experiencing a drop in sales and operations, now is a good time to review its documentation in preparation for a transaction. Companies are often surprised by the amount of detail an investor or purchaser will request, which now will only increase given the more risk averse investment culture. During due diligence, copies of all material agreements are requested, including: employment, supplier, sales, services and independent contractor agreements. The minute book of the company is reviewed to determine if all actions were properly authorized, including the appointment of directors and officers, the issuance of any securities and the entering into of any material transactions. Companies that can demonstrate strong organization through diligent documentation practices will set themselves apart from other companies that do not have the same systems and processes in place.
  1. Creativity: The sudden change in the economic environment has required companies to think outside the box now more so than ever. Traditional funding options may not be as readily available, but there are unconventional alternatives. In order to access capital, companies can look to leverage existing networks, use nontraditional securities as investment vehicles, apply for public funding either by way of grants or other government programs or modify their internal cost structure. With respect to retaining and motivating employees, companies can consider more robust equity compensation plans that incorporate awards based on future time spent with the company as well as future performance. In terms of operations, companies that continue to develop ways to adapt to work-from-home policies or physical distancing measures in a way that is least disruptive to its employees and customers, assuming the business model permits doing so, will likely weather the storm more successfully than others. Because of the economic uncertainty, creative companies may have a higher likelihood of success as the short-term economic environment could warrant more creative solutions.
    For more legal analysis of how COVID may affect your business, or personal affairs, visit Clark Wilson’s COVID-19 Resource and FAQ pages