Venture capital funding in a Post-COVID19 world

Over the last decade, more than USD 1.5 trillion was invested in venture capital financing deals worldwide, with a peak of close to USD 322 billion (SGD 444 billion) in 2018 over some 31,931 deals. 2019 saw a drop in VC investments to about USD 295 billion (SGD 407 billion) but a higher volume of deals at 32,800 around the globe, including pre-seed rounds and pre-IPO growth deals.

While the last two years saw some of the largest outlier rounds being signed, including a USD 14 billion (SGD 19.3 billion) Series C round raised by Chinese fintech firm Ant Financial, and a USD 3 billion (SGD 4.14 billion) technology growth round for ByteDance’s TikTok, the boom of the venture capital industry is currently on hold, largely due to the coronavirus crisis, and also because there are fewer fundable companies and larger funds focusing more on mature investments.

The Covid-19 pandemic has seen a third of investors retreat from seed deals in the US and European markets since March 2020, even though giants like Accel, Benchmark, Sequoia Capital and Founders Fund are still investing.

According to Ernst & Young, VC activity in Q1 2020 had seen a 10% drop in value and a 21% drop in volume, with a USD 856 million (SGD 1.18 billion) investment in GrabTaxi Holdings (Grab) by Mitsubishi UFJ Financial Group (MUFG) being the biggest global VC deal of the quarter.

It isn’t surprising to learn that many investors are playing a conservative game, with a worldwide pandemic with no end in sight, and a hard global recession looming on the horizon. That said, we take a look at how we think the VC landscape would change in the next 18 months ahead.

1. VC financing likely to continue to shrink in value and volume. There will be continued uncertainty in the months ahead, and it is highly likely that VC funding will continue to drop in both value of deals and the number of deals being signed. While VC firms and investors will continue to keep a lookout for interesting startups, the ‘new normal’ will be a slowdown in the number of rounds, more syndicated deals, and optimistically a careful recovery in the coming months ahead, depending on the financial impact of the coronavirus.

2. Interest focused on medical equipment, MedTech, EdTech and impact ventures. It shouldn’t come as a surprise that investors will be turning their investment focus towards medical equipment and med-tech as the world scrambles to find a vaccine for Covid-19 and ways to curb community spread of disease – even large and established players like Ferrari have pivoted towards the manufacturing of respirator valves, and there are still shortages of medical equipment and supplies around the globe.

At the same time, the EdTech industry is likely to see a boom as demand for efficient online solutions for learning and development continue to grow in amidst the resurgence of the virus and anticipated second waves of closures and shutdowns in Asia and in Europe.

Lastly, forget unicorns at the moment: impact ventures that offer solutions to the global crisis or social enterprises that reduce social or environmental issues that the coronavirus crisis has highlighted are likely to generate more interest amongst investors.

3. Investments into support for existing portfolios. With risk-taking on hold, VC firms are likely to shift their attention towards supporting existing portfolios while accepting only a select number of new investments. Startups that have already closed one round with investors and are able to demonstrate resilience or pivoting successfully to combat the adverse effects of the crisis are more likely to be able to drum up interest in subsequent rounds with existing VC partners.

4. Startups that ride the storm are likely to be more successful. Companies that present an ability to address the current crisis, successfully pivoted, or adjusted and re-mapped their growth strategies to work around the current economic gloom are more likely to gain the attention and interest of VCs. Investors will be interested in companies that adopt a proactive, full-throttle approach to dealing with current challenges than those that adopt avoidance tactics. In other words, founders who are able to articulate clearly how they are adapting to the new environment and work the ‘new normal’ as their baseline assumptions are more likely to be considered as candidates for rounds.

5. Deals will take longer and valuations will be lower. Future rounds will likely to take longer as investors become more cautious, and pricing will be weaker. Due diligence measures are likely to be stepped up, as travel restrictions and mandatory post-travel quarantine force founders to pitch to investors over Zoom or sending out their literature electronically – meaning that every deck, business plan, product specifications or term sheet are likely to be scrutinised further for details before you even meet your prospective investors for the first time remotely. That said, companies that need rounds to keep growing, rather than for further growth are probably better off talking to existing investors or seek out shareholder loans, and to ask for smaller amounts until the global situation improves.

The silver lining amidst the financial gloom brought about by Covid-19 and the anticipated global deep recession is forcing VC firms and investors to review and reboot their investment strategies for the next 2 to 3 years. In a sense, we are levelling an even playing field once more, with ridiculously high valuations based on paper projections and the obsession over finding the next unicorns of the late 2010s are likely to be a thing of the past. Moving ahead, value creation and sustainability by startups and early-stage companies will be defined by how they pivot, remained resilient, or make an impact in addressing current issues.

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