Investors are making tough decisions on startups

IPO option has all but dried up amid pandemic, stock market volatility

For companies backed by venture capital and private equity, the pandemic has proven to be a particularly tough time to raise cash — even as many firms need a quick infusion of funds more than ever.

Investors have considered as an option the federal Paycheck Protection Program, the newly created small business assistance fund that reopened on Monday. But the rules preclude many companies in private equity portfolios (less so in VC) from applying.

Meanwhile, the more traditional routes for raising money ― another round of private investments, or a jump into the public markets ― have suddenly become walled off.

A few local businesses managed to land a new round of funds, or have successfully gone public, amid the COVID-19 crisis. But they’re the exception that proves the rule.

Waltham cybersecurity company Randori, for example, said last week that it had raised $20 million in funding from three existing investors, and a new one, Harmony Partners. Chief executive Brian Hazzard said he and cofounder David “Moose” Wolpoff hadn’t expected to raise more capital this soon, but the pandemic hastened the timetable. The goal is to capitalize on a growing demand for cybersecurity, rather than slink into hibernation to ride out the storm. Hazzard said he expects to double the size of the 21-person company in a year, thanks to the new funds.

Paytronix, a loyalty platform provider for restaurants and convenience stores, also successfully turned to a previous financial backer for help after restaurant revenue slowed significantly. In the Newton firm’s case, it was Great Hill Partners to the rescue. The private equity operator helped lead the way for $10 million worth of funding, nearly all of it in equity, in a deal to be announced on Tuesday. Great Hill, which first invested in Paytronix in 2017, wanted to make sure the company could stay largely intact in the coming months. Paytronix chief executive Andrew Robbins said he did lay off about 10 people, but without a new investment, the cuts to his 175-person workforce would have been much greater.

Perhaps the toughest traditional route for a starving startup right now is the initial public offering, because of the stock market’s volatility and the uncertainty surrounding the pandemic’s length. Renaissance Capital, a pre-IPO research provider for institutional investors, reports that only three IPOs took place nationwide this month, with a fourth one, Watertown-based Lyra Therapeutics, scheduled to price on Thursday. All four are biotechs. Matthew Kennedy, a market strategist at Renaissance, said he expects the door to open somewhat to other kinds of firms later this spring, and he noted that startups choosing to merge into an existing publicly traded shell company, such as what Boston-based DraftKings did last week, have had more success during the pandemic.

Going public is a tricky proposition in these times. Startups no longer take their shows on the road for face-to-face meetings with investors; instead, they’re pitching via phone and video conference. That’s what happened to Imara, a 20-person biotech in Boston developing drugs to treat blood disorders. Imara raised $86.5 million in its IPO last month, to cover the costs of two global trials, but not before its physical roadshow turned virtual by the time of the IPO because of coronavirus concerns.

Few startups are this lucky anymore. Siobhan Dullea, chief executive at startup accelerator MassChallenge, said venture capital funding has all but seized up completely. Almost no one is taking even virtual meetings with startups, except for the VC firms that have already invested with them. Some are temporarily pivoting to pandemic-related work. But many others are going into hibernation.

Meanwhile, portfolio managers at VC and PE firms are busier than ever, trying to triage the firms where they have placed investments: Which companies should get more funding now, and which ones should not? John Ayer, partner at law firm Ropes & Gray, said investors want to protect their portfolio companies but are also reluctant to pump more capital into a business that’s likely to end up in bankruptcy now.

Greg Dracon, a general partner at .406 Ventures, said he has participated in more board meetings in the first four weeks of the pandemic than he has over any four-week period in his career. Some startups are told to trim their budgets. Some receive an extra infusion of cash. He said .406 decided to put more money into Randori because of the increasing need for cybersecurity, and its founders’ exceptional skill set.

It will be a time when winners get bigger, and losers fall by the wayside. Nixon Peabody corporate attorney Phil Taub said investors are often having to decide which firms they can let expire, and which ones they should keep going. The life-or-death decisions during this pandemic, it turns out, aren’t limited to the hospital rooms.