VC Funding After Lockdown

Why we’re optimistic for investors and founders in a post-covid world.

It’s not all doom and gloom… Flying the flag for optimism post-lockdown

One thing’s for sure: the arrival of Covid-19 into our unsuspecting lives has created confusion and uncertainty for individuals and businesses alike. Global travel has all but disappeared, education has been thrown into disarray, and your Saturday night pub quiz is now conducted virtually.

Here at Supernode Global we’ve been using our lockdown isolation to examine the impact of previous recessions and pandemics, to shed some light on what we might expect as the world — hopefully — begins to emerge from the current crisis. Over the next few weeks we’ll be sharing some of our findings.

First up we consider how the current situation might affect the VC funding environment. Clearly, economies the world over have taken a hit, and the funding landscape may have shifted as a result. But we’re actually flying the flag for some optimism too — there are some attractive opportunities out there for both founders and investors as the world enters its ‘new normal’.

Some cooling off is inevitable

History does suggest that inflows into VC funds reduce during times of global crisis. It is true that typically investors do cool off. In the 12 months following both the global financial crisis and the bursting of the tech bubble VC investment fell by over 30%.

Reasons for this might include:

• Portfolio rebalancing (if public markets decline, they might be overweight alternatives)
• Risk aversion (alternatives has a reputation for being more volatile than other asset classes)
• Liquidity seeking (investors may just prefer to hold cash)

However, it’s not all doom and gloom… The reduced investment may be to do with the compression of valuations which are, in part, influenced by public markets (valuations being based on perceived value of an IPO or takeover). So when stock market prices tumble, there’s clearly going to be an impact on venture capital.

This means that the canny investor could benefit from deals at a lower-than-normal valuation, enabling more capital to be saved to support their portfolio companies who might need follow-on investments.

Stock markets did tumble in the immediate aftermath of lockdown measures being imposed, and while they haven’t quite reached pre-crisis levels, have rebounded somewhat. It is still too early to conclude how these listed businesses will be affected by lockdown in the longer term.

Is it all because of Covid?

Recent research by Crunchbase suggests that the reduction in VC funding is actually the continuation of an existing trend. Global private funding can be seen to have peaked in January 2018 ($29 billion allocated), then following a gentle but downward slope with 2019 funding down 19.5% on 2018, and Q1 2020 down 13% on Q1 2019.Clearly the declines of 2020 must be partly due to Covid 19, but they might also be a continuation of an ongoing cool down that predates the crisis.

Moreover, Pitchbook data indicates that allocations into alternative asset classes are at their lowest in nearly 15 years, suggesting that those seeking liquidity or a rebalance may look elsewhere.

Crunchbase have also lifted our spirits with the suggestion that based on post-financial crisis trends, seed capital is even more likely to remain steadfast in an economic downturn. Check out their chart showing seed capital, after an initial hit, actually increasing in the years following the crisis. While other typically ‘safer’ asset classes become riskier (and indeed falling by over 50%), the risk/reward skew of investing at seed stage might be considered more appealing.

All this leaves us feeling quietly confident that the same will happen in the upcoming months post-lockdown, as investors seek innovative start-ups to support in their journey. Not only should this give confidence to investors, but also to founders seeking investment.

A downturn can’t last forever

There is also some heartening evidence to suggest that venture capital markets may be somewhat insulated from a potential downturn. At the end of June 2019, VC investors were sitting on $189 billion of dry powder indicating that they do have capacity for new investments. VC funds also tend to operate to a 10-year time horizon, far beyond the 12–18 month duration of a typical recession (indeed, with the exception of the Great Depression in the 1930s, there hasn’t been a recession lasting longer than 2 years since the 19th Century). Both early stage investors and institutional investors are typically happy to accept some volatility in the confidence that their longer time horizons will allow any downs to right themselves back up again.

Disrupt, adapt and seize opportunities

As a founder, whether your start-up is still an idea on the back of an envelope or you already have the wheels in motion, the current Covid situation is likely to be affecting your business somehow. Fundraising at the moment may seem a daunting task — but lockdown life should be no barrier to an exciting business becoming successful.

Consumer confidence might be muted and spending not as buoyant as usual but just look at the likes of AirBnb, Uber and Whatsapp — just a few examples of businesses started at the height of the 2007/08 financial crisis that have gone onto become household names!

Instead of despairing, we believe that recessions create new and exciting opportunity for disruption — empowering people to find complementary revenue streams and challenge traditional business models. We’re all feeling the pinch, but this pressure can provide opportunities to solve new problems. Products or services that reduce costs, reduce time or increase ease will be embraced as essentials in our new lives. Investors are seeking high-quality opportunities with the potential to prosper despite the economic situation — look at the lockdown-friendly companies that have thrived: home-workout company Peloton, video conferencing business Zoom, and remote healthcare firm Teladoc — they’ve all enjoyed share price rises of 40–100% since March.

Early-stage businesses also have several advantages over established players during unstable periods. While large incumbents are typically slow to implement changes, and for such changes to take effect, lean start-ups have the ability to react and adapt quickly to benefit from evolving circumstances. Additionally, the current situation might provide opportunity to hire top talent — with working from home becoming a universal norm, founders can hire from a wider talent pool irrespective of location, and offer their employees super-attractive packages allowing them to live and work wherever they like. The unfortunate rise in unemployment may also contribute to a more extensive pool of available talent.

Of course, there are potential downsides to the new home-based workplace despite the obvious appeal. Ensuring your workforce feels valued (both emotionally and financially) and included without the natural social elements we’re used to in an office can be a challenge. But the flexibility it offers clearly reflects the growing understanding that employee well-being is just as vital to business success as working location or situation. (We’ll discuss this new trend further in a later blog).

Exciting opportunities ahead

We are likely to see volatility in markets of all types over the coming months, there’s no escaping that. But our research has given us real optimism about the opportunities still available to both investors and founders.

VCs have the dry powder available and savvy start-ups will be able to offer original solutions at more enticing valuations. Times of uncertainty are in fact a chance to disrupt the status quo, and to make the most of being a smaller set-up with the ability to adapt. Meanwhile there are certainly investors out there looking to support ingenious ideas tapping into the needs of our new normal.

Never is this more true than in the world of technology. While businesses globally are undoubtedly facing challenges, technology firms are ideally positioned to adapt to the evolving situation and meet real needs. Software and platform businesses, with low marginal costs, can expand rapidly and adapt quickly according to market desires. In the current climate, technology that allows for seamless communication, entertainment (whether in the form of gaming, video streaming or audio) and remote education are set to sky-rocket.

At Supernode Global we have always specialised in investing in these media technology platforms, so we’re incredibly excited about their transformative capabilities in the post-lockdown world.

While we can’t offer you a coffee in person, we remain very much ‘open for business’ and would welcome a call. Please reach out at oli@supernodeglobal.com.