What’s the reality of private market investment amidst COVID-19? How will the ‘new normal’ differ from the past? How can companies attract investors’ attention and capital — and what’s next?
- Harry Nelis (Partner, Accel)
- Richard Watts (Portfolio Manager, Merian)
- John Doran (General Partner, TCV)
- Desire to invest remains robust, but deal volumes may moderate and practicalities are challenging, lengthening transaction cycles.
- “It’s a bifurcated market.” (Harry Nelis) Fundings and valuations remain competitive for companies advantaged by the ‘new normal’. For impaired businesses, appetite and pricing are more challenging and some are deferring fundraising to 2021.
- Companies premised on offline to online transition should “invest now for customer acquisition because we’re at a unique point in time.” (Harry Nelis) Strong disruptors are raising capital now to double down on growth and competitive advantage in a window “that might not be here in six months.” (Richard Watts).
- Continued buoyance in public markets could accelerate the IPOs of the next generation of disruptors that can highlight resilience in tough times.
- “This is the biggest channel shift in the history of the internet.” (Richard Watts) COVID-19 has compressed two years of digital transformation into two months. Many changes will be permanent and companies in every sector must accelerate their transformation.
- Primarily, COVID-19 has accelerated trends (telemedicine, streaming, payments) in which investors had prior conviction — but ‘COVID has potentially changed the game for last mile delivery, such as groceries and other on-demand delivery services.” (John Doran)
- Investors are doubling down on enterprise enablers — developer tools, cybersecurity, authentication, DevOps and automation solutions including Robotic Process Automation (RPA).
- “The high street will be changed forever.” (Harry Nelis) With one in three UK shops loss-making prior to COVID, the pandemic will accelerate the decline of the high street. In many sectors, from beauty to banking, models for consumer engagement must evolve.
- Business travel and office space are down but not out. “In the long term, it’s likely that in-person meetings will retain importance because they can help you build a deeper personal relationship and ultimately help you win the deal.” (John Doran); all expect business travel to recover to +/- 20% of prior levels. Remote work will significantly increase but there are benefits to being in an office; the probable ‘hybrid’ future has yet to be tested and may be challenging .
- “Home spend will be a big area.” (John Doran) Streaming services, home fitness, video games and e-sports will continue to command increasing attention and spend.
- Investors and founders are aligned on COVID dynamics — all recognise: there will be troughs as well as peaks in a ten year journey; companies “that get through this will be much stronger and leaner and will be in a position to thrive” (John Doran); and, without minimising the human cost of COVID, there is an opportunity to accelerate businesses aligned with the ‘new normal’.
- Speed and independence separate the best founders from the rest. The best founders “make difficult decisions rapidly” (Harry Nelis) and develop a point of view independent from ‘groupthink.” (John Doran)
- Our ‘quick-fire’ round revealed diverging and sometimes surprising views regarding the economic outlook, stock markets, governments’ responses to COVID-19 and the future of work.
1. Investment appetite remains robust but practicalities are challenging
“If opportunity is there we’ll go for it.” (John Doran)
In March, bandwidth for new investments reduced as investors allocated time and attention to portfolio support. Deal volumes in 2H20 may reduce. Nonetheless, participants retain appetite. “Merian has been active” (Richard Watts) and “early stage activity is still high”. (Harry Nelis)
Practically, investing has become more challenging. Building rapport is more difficult; many deals are with previously known companies and take longer. Investors are referencing more extensively in the absence of in-person meetings.
2. Investment dynamics are diverging for COVID beneficiaries and the rest
“It’s a bifurcated market.” (Harry Nelis)
Funding rounds remain competitive, fast and at premium valuations for companies that are in sectors aligned with the ‘new normal’ (such as remote working) or benefit strongly from offline to online migration (telemedicine). “These companies are every bit as desirable, or more, as they would have been at the start of the year. For those assets, demand is great.” (Richard Watts)
For companies challenged by COVID-19, investment can be slower and valuations open to challenge. Companies impaired by COVID are more likely to reduce burn rates and may defer fundraising to 2021 when conditions improve.
3. Strong disruptors are raising capital to invest in growth
“Invest now for customer acquisition because we’re at a unique point in time.” (Harry Nelis)
While customers are forced online, for companies premised on offline to online transition it makes sense for many businesses to accelerate investment to capture growth. Many of the strongest companies are raising additional capital to do so. “This is a period of time for many businesses that may not be here in three or six months. We think it’s the right thing for companies to accelerate their growth.” (Richard Watts)
4. COVID outperformers can IPO sooner and stronger
“For the best private businesses that navigated this pandemic…with flying colours, the stock market will pay a very high valuation multiple. There aren’t many listed companies like that.” (Richard Watts)
Public markets have been buoyed by the expectation of rapid economic recovery in 2H20 and extensive government and central bank support. With a limited number of listed companies — such as Amazon, Netflix and Spotify — that are beneficiaries of COVID and aligned with the ‘new normal’, continued buoyance in public markets could accelerate the IPOs of the next generation of disruptors.
5. “This is the biggest channel shift in the history of the internet.” (Richard Watts)
“Every company must become a software company” (Harry Nelis)
In two months, COVID-19 has catalysed two years of digital transformation as consumers and employees are forced online. After experiencing the benefits of digital services, such as online grocery delivery, for many the change will be permanent. The longer current conditions persist, the more permanent these changes will become. Companies in every sector — from oil & gas and manufacturing to finance and retail — must digitise; laggards without data and applications in the cloud will certainly be migrating now.
6. “The themes remain the same — but the opportunity is bigger and earlier.” (John Doran)
Primarily, COVID has accelerated trends — including telemedicine, streaming media, next-generation banking/payments and last mile delivery — in which investors already had conviction and commitments. For grocery and other on-demand delivery services in particular, “COVID has potentially changed the game.” (John Doran).
7. Investors are doubling down on enterprise enablers
“There’s opportunity in the enterprise.” (Harry Nelis)
Investors are doubling down on enterprise enablers, as COVID catalyses digitisation, cloud adoption and remote working and the envelope for automation expands. Priority areas for Accel and TCV include:
- Developer tools
- Authentication & authorisation solutions
- DevOps (development and operational practices that enable faster, more continuous product improvement)
- Workforce automation and augmentation solutions, particularly robotic process automation (RPA).
8. COVID will re-shape the high street and consumer engagement
“The high street will be changed forever.” (Harry Nelis)
COVID-19 will be profound secondary implications.
- With one in three UK shops loss-making prior to COVID, the pandemic will accelerate the decline of the high street. As small, independent retailers and restaurants close, fewer offline destinations will accelerate further the channel shift to online.
- Models for consumer engagement must evolve. Just 10% of large beauty brands’ sales are online. Given potential second waves of COVID-19 infection, or viruses in the future, brands must transform sales models to mitigate risk. Similarly, high street banks must transform. After replacing in-branch service counters with iPads and staff to assist, what can banks offer that consumers will not prefer to access from home?
9. Business travel and office space: down but not out
“If some are [travelling], it’ll be hard for others not to” (John Doran)
As Zoom saves time, money and hassle, companies are re-evaluating the necessity of business travel and will change their behaviour.
But in-person meetings will offer competitive advantage. “In the long term, it’s likely that in-person meetings will retain importance because they can help you build a deeper personal relatinship and ultimately help you win a deal.” (John Doran) All investors expect business travel to recover to +/- 20% of prior levels.
Similarly, while “COVID has opened companies’ eyes…that they can change the way they work” (Richard Watts), investors noted some benefits of working in an office. People in ‘apprenticeship’ industries, from venture capital to law and accounting, might learn from experienced peers more easily in an office environment.
For many companies the probable ‘hybrid’ future — with some employees working from home and others in an office — has yet to be tested. How well can meetings, such as board meetings, function with some people present in person and others remote?
10. The ‘home economy’ will drive next-gen media
“Home spend will be a big area.” (John Doran)
As people spend more time at home, expenditure on their domestic environment and experiences will grow. The shift to streaming services will continue; consumption of video games and home fitness will increase; and e-sports will continue to command a greater portion of attention and spend.
11. Founders and investors are aligned on COVID dynamics
There are “few disconnects” (Richard Watts) between investors and founders amidst the pandemic. All recognise that:
- there will be troughs as well as peaks in a ten year journey;
- great companies can emerge from recessions — “the ones that get through this will be much stronger and leaner and will be in a position to thrive”. (John Doran)
- without minimising the human cost of COVID, there is an opportunity to accelerate businesses aligned with the ‘new normal’.
12. Speed and independence seperate the best founders from the rest
“What amazes me in the best founders is the speed with which they can make decisions.” (Harry Nelis)
Amidst COVID, the strongest founders are differentiated by the speed with which they can “make difficult decisions rapidly and come out ahead.” (Harry Nelis). Further, “great founders have a way of blocking out the noise, focusing on what matters, and developing an independent view — not just following groupthink.” (John Doran)
13. Views diverged regarding the economic outlook, stock markets
Our ‘quick-fire’ round revealed diverging and sometimes surprising views regarding challenging propositions — including whether there will be an economic depression, whether stock markets are overvalued and whether governments’ responses to COVID-19 have been sensible.
We finished with a bit of fun: what would be the first thing people did post-lockdown? It appears a balanced recovery is probable…
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