Coronavirus Impact on Startups: Advice from VCs
What goes up, must come down—or does it? We talk to some local angel investors to get the inside scoop.
Over the past 2 years, we have seen an unprecedented amount of venture capital flow into startups. In 2018, a total of $245B was invested in ~18,000 startups globally—a 46% increase over 2017. By the end of 2019, the venture industry deployed $136.5 billion in US-based companies, surpassing the $130 billion-mark for the second consecutive year, according to the PitchBook-NVCA Venture Monitor, the authoritative quarterly report on venture capital activity.
In January 2020, the top 3 global investments were Santa Cruz companies including Looker, Joby Aviation, and Paystand (see Angels Spread Wings Over Monterey Bay Area). Then the Armada Group was acquired, and CruzFoam closed a significant seed round. Our tech community was making headlines around the world. And then the coronavirus hit.
Expert info from VCs
Santa Cruz Works Zoomed with 5 angel investors in our community to get their opinions about the VC world, and their advice for startups. We “groked” these nuggets about the VC community:
Most VCs are hungry and will continue to invest, but more cautiously.
New funding will take longer, and will likely be subjected to lower valuation.
VCs will apply more rigor and discipline in their due diligence.
VCs are likely to stay in their “portfolio lanes”—the areas of expertise that fit their investment mandate.
VCs are more likely to invest in biotech and B2B and SaaS startups with remote worker solutions.
Their advice for startups?:
Startups that excel in recessions or can reposition/pivot to this new reality have an advantage (video conferencing, online second-hand market places, health and senior services, online games, think necessary virtual type business).
Smart startups are dramatically cutting expenses and extending their runways as much as possible (with a notable few exceptions).
More nuggets of wisdom from our 5 angel investors:
For startups, this is a great lesson. I always tell new ventures never to forget that cash is king; take it when you can without undue stress on valuation, because you never know when macro events - the 1999 Internet bubble collapse, 9/11, the 2008 financial crisis - or Covid-19 - will immediately evaporate capital that was available yesterday. We're living this today, and in fact, I know of one company that was dithering on a term sheet because of valuation concerns, and today is out of money and out of options. If they raise money now, it will in fact be at a much lower valuation than what they were offered a month ago. In these times of uncertainty, as a startup, assume every dollar you have is your last.
Toby Corey / Zentrepreneur Life / Stanford University Lecturer
Start figuring out what you're not going to do and focus on mission critical only.
Great leaders don’t panic when everyone else is, stay calm, focused and compassionate.
Strategic critical thinking and positive mindset are everything, people feed off your energy (negative or positive.
Buckle up for a very bumpy ride. “When it is dark enough, you can see the stars.” —Ralph Waldo Emerson.
Make all meetings virtual.
Outflows to new start-up financings have dramatically declined.
VCs in general will continue to meet with and evaluate new deals, but will be VERY cautious (even though there is a large amount of raised money on the sidelines).
An experienced team with a track record will have the best chance of being funded in this environment (of course, that's true in any environment!).
Everything will be slow for the next two months and then start to ramp back.
We should expect for funding in the next 3-6 months to largely freeze up. There’s a general wait and see attitude that goes all the way up to VC’s less willing to ask their LPs for a cash call to fund a new company when those LP’s have seen the rest of their portfolio drop dramatically. VCs are saving their cash for helping existing investments weather the storm.
It’s a good time to get to know potential investors in a casual way but don’t launch a full-fledged funding sprint until the markets have calmed.
It’s a good time to look at your company and if you’ve got the right ratios of people in different roles. If you’re burning too much cash for things that aren’t essential to the company, now is a good time to course correct and get your spending in line with what profitable public companies in your industry do. Expect 3-6 months of additional burn due to either not being able to raise new funds at the moment or your growth goals being set back and so it will take longer to hit those milestones you need to raise your next round.
Finally, for those that have already raised money from investors, if you’re burning cash and will need more in the next 3-6 months, expect to need to raise money from your existing investors in a flat or down round. Don’t sweat it. Just do it to survive.
Investors are nervous, but continue to fund startups…a bit slower, more deliberate and conservatively.
We are increasing our efforts to find startups that fit our investment mandate.
Finally, we asked our favorite advisor, Ralph the Knucklehead, a few critical questions:
SCW: Do you think this entire pandemic is a conspiracy?
Ralph: No. But when there is confusion, there are people who will use technology to exploit information. The most recent example are the Russians who launched fake news campaigns making allegations that the coronavirus was a U.S. biological weapon.
SCW: Will there be a sequel to “The Knucklehead of Silicon Valley”?
Ralph: Book 2 is in its final draft expecting to be released in October.
SCW: If there is a movie about you, who will play you—Tom Hanks? Who will play Eva?
Ralph: Nah, for me, it is likely to be Forest Whitaker. For Eva, Lucy Liu.
