At the beginning of 2020, startups and investors alike were optimistic about the coming year. After all, the state had just wrapped up what was likely its strongest venture capital year to date.
In 2019, Minnesota companies raised approximately $1.2 billion across 132 deals, up from $814.4 million the year prior. The state also crowned its first startup unicorn, Bright Health.
"In my 20 years of being involved in the local tech ecosystem, I don't recall any moment in time when venture funding was more accessible across early-stage, growth-stage and late-stage," Great North Labs Managing Partner Rob Weber told Minne Inno at the time.
But just two months later, Minnesota reported its first confirmed case of COVID-19. After that, nothing was quite the same. Tech companies like Foodsby and Code42 that were previously strong and growing began laying off or furloughing dozens of employees. And previously optimistic investors were forced to adjust their expectations.
"We've never seen the economy completely come to a standstill. We're in a completely unprecedented time," said Andrew Felbinger, an investor with Urban Innovation Fund. "There are not a lot of startups that will make it through this. That's just the way it is."
The biggest challenge for both entrepreneurs and investors, he added, is uncertainty. As restrictions are lifted, it will become less of a factor, but for now, it's difficult to plan for a future you don't know. Felbinger predicts more bridge rounds of funding and internal rounds in the near future.
"There's still money out there," he said. "But fundraising is going to be a full-time job."
Reevaluating Growth Plans
Reprioritizing funding goals is just one aspect of what many companies are doing to adjust to the current crisis. For founders that recently raised a round of funding, COVID-19 is forcing them to rethink how they will deploy their capital.
Soona, a photography and advertising startup, announced in early February that it had closed on a $3.5 million round of seed funding from Matchstick Ventures and Starting Line.
"At my core, I believe that great companies with a strong vision and the best product always find funding when they need it."
"We feel wildly fortunate to have closed our most recent round prior to the crisis really hitting us hard," CEO Elizabeth Giorgi told Minne Inno. "We intend to make these funds last as long as we can. And when we go back out to raise, I know we will likely be telling a totally different story from what I had been anticipating even a few weeks ago."
The company experienced dramatic growth in prior months. It took more than 200,000 photos in 2019. More than half of those were in the fourth quarter of 2019. January had been its strongest month across its two studios in Minneapolis in Denver, Colo.
Soona had also planned to open a third space in Austin, Texas. But the arrival of COVID-19 forced the company to postpone its expansion and close its studios.
"The state of the economy has definitely caused us to re-evaluate our growth plans," Giorgi said. "We are still intending to grow fast and invest deeply in our tech, but our growth plans in terms of physical footprint for soon outposts has evolved dramatically."
Even before coronavirus hit, Soona had offered a service to companies outside its markets that allowed them to mail their products to one of its facilities for photoshoots. But the majority (around two-thirds) of the company's business came from clients physically visiting its studios for things like professional headshots.
Giorgi said the company has not made any final decisions about how to expand its runway but was considering more low-cost and remote options for its product. Right now, Soona is offering home photoshoots. Customers can send in the products they want to be photographed and attend the shoot online from anywhere with any device.
Amidst the chaos of closing studios and temporarily pivoting the business, Giorgi said the company’s investors have been helpful and supportive, and that she’s confident in the company’s future.
“At my core, I believe that great companies with a strong vision and the best product always find funding when they need it. I believe Soona is that kind of company,” Giorgi said.
Adjusting Funding Expectations
Great North Labs Managing Partner Rob Weber says that each of the firm's portfolio companies have gone through various scenario planning in order to readjust their plans. The initial shock of the crisis has passed and everyone is trying to find their new normal.
"The biggest short term challenges experienced by our portfolio companies have been navigating any necessary restructuring of their operating costs, and also navigating federal funding which they may qualify for," Weber said in an email.
"Long term, I continue to remain very bullish on Minnesota and other Midwest-based startups."
Like Felbinger, Weber believes that it will be much harder, at least in the short term, for startups to raise venture capital. He added that companies that have previously raised a round of funding will be in a better position to raise in this environment.
"The bar for getting funded will certainly be even higher given the market turmoil, but should not deter founders from trying to raise altogether if they think they are VC ready," Weber said.
During the COVID-19 pandemic, Great North Labs has worked with its portfolio companies to provide them with the necessary resources to remain afloat. Weber said the firm is also doubling down on charitable giving to nonprofits in the community.
Despite the uncertainty caused by the virus, Great North Labs has closed on two deals since early March. The total investment across both deals was $1.5 million in early-stage funding from the firm's fund.
"Long term, I continue to remain very bullish on Minnesota and other Midwest-based startups who tend to be much scrappier and more capital efficient than other startups who are accustomed to having large amounts of capital accessible to them," Weber said.
And it's not just the local firms that remain supportive of Minnesota startups in trying times. Urban Innovation Fund is a San Francisco, Calif.-based firm that established a Minnesota office a few years ago.
Felbinger believes that the Midwest produces companies that are lean, capital-efficient and profitable.
"In my opinion, it's not a time to shy away from strong business fundamentals," Felbinger said. "It's time to show that off and reap the benefits. That's in the Midwest's DNA. We came out here in 2018 because we knew you didn't need to be on the coast to build the next unicorn. We feel more confident in that than ever."
