Startups have been at the heart of venture capital funding for the past few years, and expectations were high at the start of 2020. The last 24 months saw more than 25,000 global startups funded annually, with 2019 being the second-highest for invested dollars in the last decade. But as COVID-19 threatens our physical and economic health, economists are predicting the worst. In light of this challenging market, venture capital funding for startups in both Spain and Europe is set to take a significant hit.
But while some experts fear for the worst, many VCs are ready to face the challenge. If they could survive previous crises, what’s so different about the current obstacles we face today?
From shifting attention to their portfolio companies to getting behind rounds for short-term funding, VCs are looking at past crises and prioritising the industries which can thrive today. Technologies designed to help combat the virus and respond to our new normal are set to become key targets for VC firms’ increasingly selective investment strategies. In fact, R&D is a sector that could benefit from the crisis – with companies focused on medtech and healthtech seeing similar positive signs.
Deals will slow down
Many venture capital firms are understandably taking their foot off the gas. According to Crunchbase, COVID-19 has had an immediate impact on 5,000 to 7,000 startups per quarter, whose growth is dependent on venture funding. Startups in mobility, travel and hospitality have seen markets evaporate overnight, and high-valued unicorns are making the trip to the bank.
‘Most startups should expect a “new normal” with fewer rounds, more syndicated deals and probably more caution on valuations.’ That’s according to Romain Lavault of Partech, and it’s a feeling echoed by Sander Vonk at Volta Ventures. ‘At Volta Ventures we expect a steep decline in the number of deals in Q2 with careful recovery in Q3 and Q4 2020 depending on the duration of the financial impact of the new coronavirus.’
This trend extends to corporate venture capital investors, who drove much of the VC market’s hyper-growth in the past few years. For CVCs across the globe, investment decisions are either being postponed or scrutinised with fresh rigour. ‘In that hunker-down scenario, all spending goes through a rigorous review, obviously,’ says Pradeep Tagare, head of the $250-million corporate venture fund at UK-based energy company National Grid. ‘One of the first things that gets hit is the venture capital part of it, because that’s an easy thing to step back on.’
Prioritising existing portfolios
Many VC firms are consolidating their existing portfolios as they reduce the number of new investments they’re taking on. As Max Bautin, managing partner at early stage fund IQ Capital says, ‘We are investing a lot of effort into our existing portfolio, to help address today’s challenges and opportunities.’
With restrictions on travel, making in-person meetings a thing of the past, new business relationships are harder to forge. Tim Levene at the fintech venture capital firm Augmentum makes it clear that the firm’s existing portfolio is their number one priority: ‘We’re unlikely to jump in if a business asks for capital urgently and we don’t have a relationship with them.’
And that support is not just financial. Jeff Richards, managing partner at GGV Capital – early investors of Slack, Alibaba and Lime – told Bloomberg News that he has been in close contact with portfolio CEOs and founders to coach them through this crisis. His key takeaway? ‘Be a leader, be confident, and increase your level of communication with your team.’
Looking to past crises
Despite such difficult circumstances and no end to the pandemic in sight, venture funds are up for the challenge. And with the benefit of hindsight, firms are able to look back to past economic crises and gain valuable insights for today’s climate. Going back in time to the 2008 financial crash shows that, while there were companies that were forced to shut down, there were also some winners. Household names like Slack, Lyft and Pinterest continued to raise funding and even completed several seed rounds in the midst of the recession, while others like Netflix took the challenging environment as a push to pivot.
For some VC funds, the current situation isn’t quite as gloomy as previous crises. Artturi Tarjanne, co-founder of Finland’s oldest venture capital fund, Nexit Ventures, believes that public funding will be used to remedy the situation more quickly and actively than during the economic crisis in 2000. He makes it clear that learning from past downturns means reevaluating the way VC funds assess potential investments. While growth potential is the most important factor when the market is doing well, in a strained economy, that focus must shift to profitability. Investors don’t want to continuously pour money into loss-making businesses, and need to see when positive cash flow will realistically start to happen.
With profitability such an important factor, it’s no surprise that VCs are now prioritising the industries they know can profit in an economic crisis – such as technology.
Turning to tech
The tech industry is apt to persevere – and even thrive – during economic downturns. That’s according to data collected for a Crunchbase analysis by Kareem Aly, a principal at Thomvest Ventures. For this reason, VC funds are turning their focus toward technology and R&D, particularly those businesses designing products and services with a social impact. Firms like 4impact and Blossom Capital are setting up new funds dedicated to those high-potential startups with a focus on impactful solutions to the coronavirus.
Some firms are going so far as to highlight specific trends that will continue to grow in a post-COVID-19 world. From the future workplace to online health, these sectors are of particular interest to investors going forward. At Goldman Sachs, Clif Marriott – co-head of the firm’s Technology, Media and Telecom Group in EMEA – observes that the COVID-19 crisis is accelerating growth in e-commerce and collaboration software. Take Slack or Zoom and the shift to online working or Amazon’s continued growth as lockdown and social distancing encourage consumers to shop online.
And it’s not just venture funds that are pushing for impactful businesses. The European Commission is set to launch The Innovation Fund in 2020, which will focus on highly innovative technologies and big flagship projects that can bring on significant carbon emission reductions. Amounting to about €10 billion, the fund will boost growth and competitiveness for European companies, supporting up to 60% of the additional capital and operational costs linked to innovation. With this in mind, tech transfer will be vital to building on this momentum and establishing impactful, financially stable businesses.
Looking Forward with The Collider
Venture funding is always looking out for innovative tech startups. Here at The Collider we are uniquely placed to bring together researchers, corporates and entrepreneurs to enhance our ecosystem and create a positive impact on our society as a whole. Powered by Mobile World Capital Barcelona, we understand how to maximise tech transfer for startups.