Distance investing

Posted by Éléonore Jarry-Ferron on Apr 07, 2020

Brightspark has been intentionally quiet over the past few weeks. We really don’t want to post content that everyone is already hearing or reading elsewhere - information overload is nothing anyone wants now (or ever). We are heads down focusing on internal communications with our existing portfolio and our LP investors.

Also, we’ve been busy leading a new investment.

The “new” reality is that we continue to invest, but with a slightly adapted thesis. Instead of writing yet another high-level VC view of the crisis, we’ve decided to take a more direct approach and give you a behind-the-scenes look at our latest investment. We hope this gives you an idea of how we at Brightspark, as early-stage VCs, are making investment decisions right now.

Here are some of the deciding factors
behind this investment

It is an early-stage, pre-scale company. 

Over a year ago, I wrote about our approach to pre-Seed/Seed deals. This year, it’s likely that we will invest in more companies that are at this stage.

This is because the biggest risk that tech companies face right now is running out of cash before life returns to (a new) normal. Companies in a very early stage are not yet focused on scale and generating massive revenue, instead they are heads down building their tech and testing business assumptions. They do not depend on customer payments to calculate their burn rate and hit their next milestones.

Because of this, Seed companies are well-positioned during an economic slowdown. They can emerge from a recession with next-generation technology and be in a strong position to become market leaders.

To quote Paul Graham, Investors: Any startup that gets started during the next few months is disproportionately likely to succeed. Success depends most of all on determination, and imagine how determined you have to be to start a startup in the middle of a global pandemic.

It is an IP-driven company. 

We believe that now is the time to invest in companies that are focused on creating value in their Intellectual Property. Brightspark has always had a positive bias towards companies with truly proprietary technology.

Now more so than ever, we will be wary of ideas relying predominantly on traction and network effect moats. For companies that have the necessary resources, an economic slow-down is a good opportunity to work closely with key customers, enhance the value proposition, and develop product leadership.

The CEO is transparent and reactive. 

We always tell our CEOs that there is no such thing as good or bad news – there is just news. We look for honest relationships, and always aim to be a founder’s first phone call. This will become increasingly important as we build founder-VC relationships entirely remotely.

While I did meet the team in-person once before the pandemic, conducting our due diligence and negotiating the term sheet remotely was a positive experience. The team kept us in the loop about how they are adapting to COVID-19 on a daily basis - giving us front row seats to the team’s ability to react and adapt in difficult scenarios. We did not revisit the deal terms, although valuations are and will be decreasing significantly.

It’s extremely cash-efficient

We recognized that a cash-efficient mindset came naturally to the CEO. Since the company’s inception, the team has spent every single dollar in a smart and calculated way. They are making the most out of the non-dilutive funding available to them.

It goes without saying that this mindset will be a key asset over the next months. Margins are good and growth is mostly organic. For this reason, the company has a very low burn rate. The round will give them many years of runway - even assuming no revenues at all. Given the circumstances, we also made room for a co-investor and encouraged the CEO to take in additional capital that was on the table.

Their value proposition will benefit from the pandemic in the long-term. 

Work habits will be forever altered by the major shift of behaviours COVID-19 has forced on the world. We are looking for solutions that will help consumers and enterprises further leverage the digital world.

We are not considering investments in companies that temporarily gain from the pandemic, or that do so in an unsustainable way. We are looking for solutions that were in high-demand before, and will see even faster market adoption post-pandemic.

By making a long-term investment in a pre-scale, IP-driven startup, we are making the most of the economic slowdown. The company can run fast as it is less distracted by the covid crisis, compared to operating companies that have to react to current customers, manage cash and predict markets. They can be heads down focused on creating an amazing solution that is unique and powerful. That, to us, is really good use of investment capital.

We are investing through our Brightspark Canadian Opportunities Fund, and we have also decided to make this deal available to our network of accredited investors through a Single Purpose Vehicle. The financial situations of our investors are varied - some understandably don’t want to invest new capital right now, but many are looking for curated VC investment opportunities like this one.

If you are an accredited investor and are interested in learning more about our investment opportunities, we invite you to create a free investor account.

And if you’re building a company that fits the thesis above - talk to us.

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