This spring has already been placed into one row with such world crisis as the ones of July 1997, Spring 2000, September 2001, August-September 2008. Crisis that have significantly touched the investment field. Thus, VCs are already trying to bring together their previous experience in order to get by and help startups to do the same.
Most of VCs admit they and their colleagues do have reserve funds and are simply waiting for a market volatility to return to their normal activity. Although their confident quotes seem credible, the real situation might appear more ambivalent than it seems to be.
Even during and moreover after the August-September 2008 crisis, which is considered to be the less investment affecting one, there was a valuation and early stage investment decrease together with a significant increase of the deal closing duration. The crucial difference for venture capitals between 2008 and 2020 consists in total market shutdown that already results in a violent recession. For some VCs the only hope is in subsequent pandemic spread which means that earlier the region is infected sooner it enter the recovery stage.
While investors prefer to keep their distance from expressing definitive attitude towards the global situation, it is already clear that in the post-COVID world the eventual prices and terms will be less favorable. At this point, the startup stage is highly important. The early-stage ones are recommended not to over-negotiate the price while the growth ones have to show really convincing metrics together with a clear expansion plan for the three upcoming years.
VCs face the current extraordinary situation as a good time to segmenting their portfolios, especially their later stage projects, dividing them all between pandemic positive, pandemic neutral and pandemic negative analyzing the COVID-19 impact and consequently resplitting their current rounds between these three categories. Thus, a startup should prove its antifragility and adaptivity to get more investment attention and funding.
This means new startup evaluation criteria including supply chains, demand impacts, length of sales cycles, and any long-lasting changes in customer behavior are involved and should be imperatively taken into consideration by startups presenting their decks despite the world confinement.
Another tricky question is the exit one. Many investors are officially reporting deals being frozen resulting in their strong concern mostly related to public company buyers in comparison with financial or private equity ones. They also point out the differences between deals with committed parties, those that investors are unable to abandon and the ones based on the stock price of the buyer.
Despite a long lockdown and slow return to the pre COVID-19 life, European funds confirm to be looking at expanding their portfolios. At the same time the US funds are already stating a significant activity decrease for the second and third quarters of 2020 as most of them are adopting to the new remote work reality. And yet, the VCs from both regions agree on the point that the “corona” crisis feels more like the one of 2001–2002 when not only investments were not done for almost three years but also all the valuations were decreased by 80%.
At the same time, the VC space recognizes that for some techs like edtech, medtech, legaltech and fintech the current pandemic turned into a development opportunity. They also state that such domains as construction tech and logistics tech had to rapidly digitalize themselves to stay alive.
Venture capitalists, angel and private investors despite their funding interests and currently adjusted intentions have yet one common concern: most of the startups might not survive the pandemic due to a difficult access to allocations and instant revenue decrease.
So, what professional investors advise startups? First, they should adjust their forecasts for the Q3 and 4 of 2020 as far as for the upcoming 2021 as no public or private sector will remain untouched. Except for marketplaces and e-commerce, of course. Second, keep your eyes on all the changes in social behavior and general attitudes of customers that will never be the same again: becoming hostile to travelling and migration, they will take into consideration a careful energy and natural resources consumption and will take the advantage of simple leisure. Third, take into consideration a return to sustainable unit economics if possible. The last but not the least: startups should become more open to all types of collaboration and move towards creating a global tech ecosystem.
