Venture Capital in Times of COVID

COVID-19 is clearly the black swan of the century. From the bakery next door, to your preferred airline, to your favorite clothing brand, the virus has permeated all industries worldwide.

The venture capital industry is no exception. During the past 3 months, we have communicated with numerous different players across the VC community on the subject of COVID19, and wanted to share some insights and strategies we think may be of service.

The general effects of COVID19 on the Venture Capital environment revolve around three key points:

  1. Fewer deals and longer financing rounds: Times of economic uncertainty breed slow decision making. Investors are leaning towards a more conservative approach. Further, with self isolation and logistical challenges during this time, face-to-face meetings are not possible, which inherently slows deal flow. Presently, there has already been a slow down in deal flow, with investors decreasing the rate of capital deployment into new investments.
Source: NFX VC & Founder Sentiment Survey: 286 founders and 114 VCs https://www.nfx.com/post/the-vc-startup-sentiment-survey/

2. Lower valuations: Supply and demand in venture capital are shifting, quickly. Founders are worried, to say the least, and are likely to press for as much capital as they can get to navigate this uncertainty. Further, investors are raising the bar on new investments, some even halting new deal flow for the time being. Hence, startup valuations will begin to decrease, significantly. In fact, there has already been a noticeable reduction in valuations, on average 20%, anecdotally. This effect is illustrated in NFX VC & Founder Sentiment Survey linked, and shown below:

Source: NFX VC & Founder Sentiment Survey: 286 founders and 114 VCs https://www.nfx.com/post/the-vc-startup-sentiment-survey/

Considering this, we have put together the following conclusions that may be of interest for the different players in the ecosystem:

For founders:

In case you haven’t already heard it a thousand times, focus on extending your runway as much as possible. Last week, founders were being told to ensure a 12 month runway, at the least. Given recent happenings, however, this is not enough. Consider extending your runway to 24+ months. The worst thing that could happen is that you were too conservative. Remember, this is a time to focus on survival, retaining current clients, and growing with limited resources. Sequoia Capital’s Matrix for COVID-19 illustrates possible lockdown scenarios and potential strategies startups may implement, shown below:

Source: Sequoia Capital’s Matrix for COVID-19. https://medium.com/sequoia-capital/the-matrix-for-covid-19-c25bd5195f46

For investors:

First and foremost, focus on your existing portfolio. Work with your founders to help them achieve the desired runway extension and reduction of cash burn. Support is needed, now more than ever.

When it comes to new deals, while some of you may be inclined to pull out of investing during a downturn, history has shown us this may not be the best reaction. Some of the best companies have risen in the midst of an economic downturn, such as Uber, Google, and Amazon to name a few.

Source: Funding in the time of Coronavirus, Mark Suster — Upfront Ventures. https://bothsidesofthetable.com/funding-in-the-time-of-coronavirus-9bcf7cdfd357

While we most definitely do not encourage impetuous behavior, we do believe that there are opportunities to be taken from this time. Investors will benefit from continuing to actively look for investment opportunities, attractive business models and disruptive technologies. Further, we encourage everyone to exercise fairness when it comes to valuation, and to focus on building long-term relationships rather than taking opportunistic approaches. This essay by Tribe Capital might help you understand why it’s better to be a long-term player instead of taking an opportunistic approach during this pressuring times. Finally, portfolio diversification is recommended to be a priority among all investors in order to lessen the effect of this global crisis.

These are difficult times for everyone. However, it is important to remember that humankind has proved to be resilient and adaptable during times of crisis. Some of the biggest innovations have come from moments of tremendous stress, and new opportunities arise from drastic changes in people’s lives. In the words of Charles Darwin, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

Written by:

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. Investment analyst at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

Stay updated about Venture Capital, innovation, entrepreneurship and more! Sign up for AC Venture’s monthly Newsletter.

Follow us on LinkedIn: ACV_VC

Follow us on Twitter: acv_vc

Follow us on Spotify: https://open.spotify.com/show/5K0i5z43ZM3PLiDs9Sa8Px?si=FIAJuB_CSN-3MWKC3Qn7Qw

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.