Although Europe will look to have the pandemic under control in the course of this spring, the economic implications are likely to affect businesses for a long time after.
Having spoken with investors and entrepreneurs, many say that in a crisis, you see the best and worst of behaviour from VCs. Whilst the strong message from many is that VCs are still open for business, in the last few weeks I’ve seen term sheets being pulled at the last moment and deals stall at a relatively advanced stage. Starting a deal from scratch right now is undoubtedly more of a challenge but for some, it will be unavoidable in order to survive.
Many VCs will have been focused in the last few weeks with looking after their portfolio companies. I would imagine those portfolio companies are looking at revising budgets, conserving cash and dealing with the reality of extended sales cycles and conversions. Many portfolio companies may be having to face the harsh reality of furloughing staff and many management teams will be expected to take salary reductions and/or deferrals.
If you are company looking to raise equity investment, the above probably won’t leave you feeling very positive. Although undoubtedly tougher to raise capital, the good news is that many VCs will look beyond short-term events. Deals are very much still happening although more so where there are pre-existing relationships. Funding capacity in the market is good since VCs in general have healthy pools of dry-powder in funds. Therefore don’t assume you can’t raise money right now. Whether you are in the middle of a funding round or about to kick off a new one, here is my list ofkey points to keep in mind during a crisis…
It isn’t all doom and gloom - the best and growing companies will continue to get funded as will those providing solutions in the downturn. Many new funds have been raised in the last few years and so there is still plenty of VC funding in the market. The challenge I see for companies is that VCs will deploy that funding slower to maintain reserves and to help existing portfolio companies by making follow-on investments. The same can be said of Angel Investors and Family Offices who I believe are also less likely to invest in new companies and instead shift focus to their investments in existing portfolio companies. These comments are my general thoughts – each investor will be different and their analysis will differ depending on their portfolio, where the fund is in its lifecycle, how many challenging situations they are dealing with and how much portfolio triage is needed.
From an investing point of view, the equity market will slow down significantly so I expect to see overall far fewer rounds in 2020 than I’ve seen over the last couple of years.
Many years ago, an old boss told me something that has stuck with me: “People do business with people they like.” Funding and venture capital is all about people and relationships. Even with amazing applications like Zoom, you can’t replicate that face-to-face/in person contact which I really believe counts for so much. However, as we adapt to current circumstances, utilising these applications as part of your fundraise, at least for now, will be key.
It is to be expected that appetite to complete equity investments would drop in the short term as the country and the rest of the world went into urgent lock-down. Once we have clarity on the relaxation of lock-down restrictions in the UK we expect to see many more investors pressing on with deals. Things will get back to some sort of normality but in the meantime, we need to embrace the ‘new normal’.