Venture Capital in Times of COVID-19

COVID-19 has been (to date) the black swan of the century. From the bakery next door, to your favorite airline and even your favorite clothing brand: the virus has affected every industry in the world.

The venture capital sector is no exception. Over the past three months I have talked to numerous people from the venture capital community around the world about how to deal with the effects of the COVID-19 pandemic. Some of the ideas and strategies that emerged from these conversations could be useful for the venture capital ecosystem in three key aspects:

1. Fewer agreements and longer rounds of funding: In times of economic uncertainty, such as the one we face today, decision-making is drawn out and investors opt for a more conservative approach. Social isolation and the logistical challenges it implies also make face-to-face meetings impossible, which logically diminishes investments. At present, a slowdown has been detected in the level of agreements reached, as investors reduce the rate of capital deployment for new investments.
   
   
2.  Lower Valuations: Venture capital supply and demand are changing rapidly. Entrepreneurs are, to say the least, concerned, and will probably press for as much capital as possible to ride out the storm. Moreover, investors are raising the bar for new investments, while some are even temporarily stopping investment in new businesses. As a result, new company valuations will start to decrease significantly. In fact, there has already been a considerable decrease in valuations, 20% on average, as illustrated below:
   
   
3. Economic recovery will take time: The most optimistic opinion is that the economy will take a year to recover, while the least optimistic predicts a longer recession and the start of recovery within two years (or even more). Whatever the case may be, it would be prudent for all the actors in the ecosystem to have a plan for the worst possible scenario. As the saying goes, “wish for best, prepare for the worst”.

Taking these three aspects into account, the following conclusions may be of interest to the diverse actors in the ecosystem:

Entrepreneurs

In case you haven't already done so: focus on extending your liquidity to survive for as long as possible. Last week, entrepreneurs were told to secure liquidity for at least 12 months. However, given the current circumstances, this is not long enough. Consider extending your liquidity for more than 24 months. The worst that could happen is that this calculation turns out to be too conservative. Remember that right now you need to focus on survival, on retaining your clients and on growing with limited resources. The Sequoia Capital matrix for COVID-19 illustrates the possible lockdown scenarios and potential strategies that startups could implement: 

Investors

First and foremost, focus on your current portfolio. Work with entrepreneurs to help them achieve the liquidity and capital increase they want and reduce their current expenses. Now more than ever, support in every form is needed.

When it comes to new businesses, even though some investors choose to withdraw their investment during recessionary periods, history has shown that this might not be the best decision. Some of the most successful companies were created in the middle of an economic crisis, such as Uber, Google and Amazon, to name a few.

Article published in Forbes.