We are excited to partner with Pitchbook and NVCA to provide the definitive review of the US venture capital ecosystem for 2019.
The ongoing COVID-19 outbreak is leaving a trail of aftereffects: countries are restricting travel, sports leagues are temporarily suspending operation, the public markets are spinning, and companies and institutions across the world are taking cautionary measures.
While public safety is clearly the utmost priority, it’s natural for any business to think about the ramifications this trying time could have on them. Recently, there has been lots of advice coming from all corners of the venture-backed environment. Notable pieces include:
- Sequoia’s Black Swan post
- Samir Kaji’s summary of the impact for micro VC funds
- Elad Gil’s updates for startups
- Maren Bannon’s twitter thread on virtually pitching VCs
- Semil Shah’s guide to fundraising in a pandemic world
- Gil Dibner’s letter and guide for early stage startups
- and Mark Suster’s presentation from SaaStr “Funding in the time of Coronavirus”
Here’s a look at how some routines might (temporarily) change as a result of COVID-19.
There’s still a lot of capital that needs to be deployed. There are more VC funds in the US than ever before, and the money they’ve raised needs to go somewhere. Investors still have a strong desire to invest, especially in early-stage companies.
Companies that may have a harder time raising money are those that will be constrained by COVID-19’s effect on supply chain and impacted industries (travel, events, etc). But it’s not all bad news. As Semil Shah pointed out, “areas like work collaboration, social media tools, homeschooling networks, and more are suddenly now imagining the prospect of new opportunities.”
Some investors have already been telling companies to reduce burn rate and focus on a path toward profitability. This advice looks all the more prudent now. At the same time, if you can afford to raise money now—and it’s available—it may be a good idea to do so. If your valuation increases, it can make acquisitions even cheaper should the opportunity come up this year.
In general, expect funding to take longer and valuations not be as rich as they once were. And get good at pitching via video conferencing.
The trend of large party rounds may come to a slowdown, since angels invest their personal capital which is more likely to be tied to the public markets. A smaller number of active angels may give VCs an opportunity to get into deals even earlier. Remember that angels really rose to prominence coming out of the 2008-2009 recession to fill the funding gap for entrepreneurs that had a great idea but were too early for institutional capital. If you’re willing to still be an active angel during this time, there will probably be great deals to be found.
Lots of funds will still have ample dry powder to deploy—the money funds have raised isn’t going anywhere. If one part of a portfolio (like public markets) dips, people seek diversification, and there’s plenty to be had in private companies. People search for alpha and venture remains an area where alpha will continue to exist.
Funds may look to invest in their existing portfolio first, and they may change the types of companies they consider. Funds may also have to work a little slower as “managers will be asked [by LPs] to extend time between funds to three years,” says First Republic Bank’s Samir Kaji, “and encourage a slower deployment pace.”
Unless you are a name brand partner spinning out of a name brand fund, you are unlikely to raise a new fund this year. Even if you are successfully getting interest in a new fund, expect your raise to take a little bit longer than you anticipated.
It’s unlikely that many LPs will default on committed capital to funds. Here’s why:
- The penalty for defaulting means the LP loses any assets they have already invested in the fund, which harms their reputation for future participation.
- Before a default is about to happen, the LP (and the fund) will try to sell their stake to another LP—even if it has to be done at a discount.
If the current climate affects any LPs, it’s more likely that high-net-worth individuals and family offices in lower performing funds could look for ways to get out of their commitments. Many may just stop making any further capital commitments until the markets settle.
It’s a pause, not the end
No matter what you read, just realize that this isn’t a “cancellation” of business as usual, but more of a pause. While we expect VC fundraising to be down significantly during the first half of the year as people wait out the first and second-order effects of COVID-19, there will still be plenty of deals that occur.
The second half of 2020 is going to depend greatly on how markets and the macro economy recover, as well as how events like Brexit and the US election play out. Again, no matter what happens: great companies and funds will continue to start, grow, and succeed. Don’t forget that many great companies started or grew significantly during previous market dips: Salesforce and Google after the dot-com bubble, as well as Uber and Airbnb during the 2008-2009 recession.
This industry has been through tough times like this before and has always come back stronger.
Note: Carta is actively monitoring the COVID-19 situation and we are prioritizing the safety and well-being of our employees, customers, partners, and the general public, as well as the continuity of our business. It is still too early to tell what the full impact of COVID-19 will be, but at this time we do not anticipate material impact on our services to customers. We are committed to proactively communicating with customers and partners if circumstances change.
DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
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