The devastating effects of coronavirus on the public markets also is being felt in the venture capital market, as tech investors tell their portfolio companies to reevaluate their balance sheets.
“Raising money is never easy for VC funds or for VC-backed companies,” said Jon Medved, founder and CEO of the investment platform OurCrowd. “However, we just went in a matter of weeks from one of the best fundraising environments to one of the most difficult.”
While some companies have seen large rounds since the US began to significantly feel the effects of the virus — San Francisco-based cloud infrastructure automation HashiCorp announced a USD 175m Series E raise at a USD 5.1bn valuation on 17 March – investors say a slowdown in investing is inevitable.
Mergermarket data shows there were 31 venture capital financing between 2 March and 9 March in Technology Media Telecom (TMT) startups, but only 15 such deals between 10 March and 17 March.
“Coronavirus is already impacting the VC market and there will be a clear slowdown on funding at least during the next two quarters as VCs focus on keeping their portfolios running,” said Astorre Modena, managing partner at Israel-based Terra Ventures.
After those two quarters, the question of when investing will pick up again will depend on the depth of the crisis, though it will take time for funding to reach the record levels prior to the crisis, said Modena.
Jeff Richards, managing partner at GGV Capital in Menlo Park, California, said there will no doubt be fewer investment checks written in the next several weeks, and this crisis gives companies a chance to reset and recalibrate. While the top 5% to 15% of companies will not have a problem weathering this storm, the crisis still gives all companies a good opportunity to review their business, he added.
Technology already had been seeing a fundamental shift in investing from the consumer side to the enterprise side for the last nine months — partly due to factors such as the issues Softbank and WeWork have faced, he said. That trend toward enterprise will continue with the crisis, said Richards.
Expect a drop and cuts
It is not unreasonable to estimate a 20% to 40% drop in top-line estimates for enterprise-facing companies due to the crisis, said Richards. Consumer-facing companies may be worse off, he added. All companies are likely going to look at a way to cut their cash burn rate and thereby extend their operating runway, he said.
The easiest money startups can raise today is the money they cut from their burn rate, said Medved.
“If you can cut USD 500,000 a month from your burn and still execute your business plan, then you just raised USD 6m for the next year,” he said. “Those kinds of deep cuts are difficult to accomplish but necessary, and the quicker they are executed the more meaningful they are in the long run.”
However, no one should expect private technology companies to significantly dial back on growth and try to get cash flow positive extremely quickly, said Richards. The market has overwhelmingly rewarded growth over profitability for more than a decade, he added. He pointed to the successful IPOs of both Datadog [NASDAQ:DDOG] and Bill.com [NYSE:BILL] last year as examples of even public investors favoring growth over profitability.
Ray Rothrock, a private investor who was a partner at Venrock for a quarter of a century, said most venture capitalists will look through their portfolio and run “stress tests” before they deploy capital into new deals. As the economy slows further, growth rates could flatten or turn negative and thus startups not yet profitable will consume more cash than expected, he said. New money will be expensive if valuations slump, so typically the insiders will carry the company to the other side of the chasm, he added.
Venture capital needs to invest
Rothrock said he believes there is still a lot venture capital cash on the sidelines that needs to be put to work.
“It’s okay to invest, but it’s not okay to invest at January prices, or assume January growth rates,” he said. “That’s the tricky part. Best assurance for a VC is to have a really solid syndicate in the deal, and a terrific CEO who is wise, careful, and can raise money.”
Some startup founders know a slowdown already is here.
“The economic downturn has definitely caused some new funds to be delayed,” said Danny Gardner, founder and CEO of Mesh++, a company that makes mesh WiFi networks.
“Investors that require the approval of LPs for every investment are not expecting to make fast decisions for a couple months,” he said. “Neither has affected our fundraising plans yet but will likely delay them.”
A crisis with opportunity
Avi Reichental, founder and chairman of XponentialWorks, a venture, innovation and advisory firm in Ventura, California, said he senses in the immediate future there will be a level of paralysis. However, this crisis also presents an opportunity to course correct as well as support the best companies and making sure everyone emerges stronger on the other side of this perfect storm.
While private investors may be more cautious, Richards said that every downturn – the dotcom bust, 9/11 and even the Great Recession – have produced huge, iconic companies. He pointed to how both Twitter [NYSE:TWTR] and Facebook [NYSE:FB] survived the economic downturn of 2008.
Companies with a focus on telemedicine, remote learning or work from home technologies could see increased investment interest, as their sectors become buzzwords during the crisis, said Richards.
“The opportunity has never been better, he said. “On the other side (of the crisis), things get better and iconic companies are built.”