HOW WILL COVID-19 AFFECT VENTURE CAPITAL INVESTMENT STRATEGIES AND VENTURE-BACKED STARTUPS?

May 13, 2020

No doubt, COVID-19 is shaking up the markets, and we are seeing more uncertainty in the public markets and venture segments than we have since 2008.

VC Investments Will Likely Become Somewhat More Conservative

Among the #VCs the general response to various industry surveys, a little more than half thought they would make fewer and small investments into next year, although almost half predicted no change.

More interestingly, though, a vast majority expected to invest at smaller valuations. Even though many firms are split on the question of whether their own investments would become more conservative, almost all of them thought that the market (including other private investors) would rate potential investments more conservatively.

VC Funds Want To Help Their Investments Through This, From A Strategy Standpoint

About 80% of surveyed VC firms were in touch with their portfolio companies to offer guidance and hear grievances, VCs in general still want to help their companies succeed. It seems like the VC community is interested in making sure their investments survive for the long term, but not banking on it.

Vcs At This Point Think Caution Is The Best Plan

Overwhelmingly, VC firms are of the opinion that their portfolio companies should (at least for the moment) play it safe and make no sudden moves.  Cautiously advancing core business was the is their primary recommendations and that aligns well with the forecast for the private markets as a whole:  If everyone is aggressive, we all burn capital. If everyone is too conservative, the market dries up.  It appears like VCs seem to agree that playing it close to the chest for the moment is the best way for both specific companies and the market as a whole to get through this downturn without going into total panic mode.

However it should be noted that adhere to the strategy of “Buy When There’s Blood in the Streets”  is still a minority view of less than 15% were advising portfolio companies to “move fast when others and win market share while others are fearful.”

It Is Unclear How The Last Six Months’ Valuations Should Be Adjusted

When the market goes through a significant adjustment like this, what should happen to recent independent valuations?  It turns out, over half of VC are not sure.  The #COVID-19 market effect constitutes a material event for all private investments. Startup management teams can both give a better equity deal to their employees and prevent venture-killing down rounds by dealing with this now and re-establishing Fair Market Value in the context of the new market dynamics. While much remains uncertain, many investment analysts do not see the market pretending this episode in history did not happen and believe that companies and their investors will begin to act accordingly.

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May 13, 2020