Venture business ceased to be a startup market, becoming an investor market

Billions of people have never been locked in their homes for such a long time. The coronavirus pandemic hit the planet globally, knocking many riders out of the saddle, significantly weighing the burden of the second, and completely destroying the third. The virus, due to its scale and unexpectedness, has completely changed the world, which will never be the same. The transformation has affected business areas, and venture business is no exception. Due to the pandemic, the venture business ceased to be a startup market, becoming an investor market. Many companies have already lowered their ratings by several times, and the founders have to put up with the fact that their share in the business is significantly eroded already in the early rounds of financing.

Global crisis

We can’t consider the crisis as something completely new. Similar events, including large-scale pandemics, used to happen before. It’s worth just recall the pandemic of pish flu raging in the 18-20s of the last century. The scale of COVID-19 is, fortunately, not so impressive. But the measures taken by the governments of almost all countries are truly unprecedented. In fact, many industries, such as tourism, will need to be built from scratch. Many aspects of life in developed countries in the field of healthcare and logistics will be rethought, companies will deeply rethink their business processes, will take a different view on automation, the issue of the work of distributed and remote teams will be on the agenda (what used to be with startups); many people will change their habits by changing their attitude to work from home, business trips, telemedicine, shopping for goods and services online, food delivery, and much more.

I will give examples. Yelp announced the dismissal of more than 1,000 employees and reduced CEO compensation by 30–40%, and the company’s revenue is expected to fall by 56%. Airbnb expects a revenue reduction of 56%. Due to the massive withdrawal from the market of small and medium-sized businesses, Google and Facebook together will lose more than $50 billion in revenue this year (50% of Google’s revenue is small and medium-sized businesses).

But many startups, as has happened before, will saddle new niches and patterns of behavior and will try to capitalize on these changes. A striking example of such changes in the past crisis can serve the same Airbnb. The company was launched during the US mortgage crisis in 2007. Many American families were faced with rising rents and the threat of mortgage debt during the crisis. The consequences of the mortgage crisis in the United States led to the global economic crisis, which forced travelers to cut budgets. At this moment,  the company acquired possibilities for its development. Due to Airbnb, almost half of the service customers were able to save their homes by renting their premises, and travelers received a new format of accommodation.

Who did win?

Unlike past crises, this one was too sudden and is developing too quickly and on a large scale. The outbreak of coronavirus overnight struck many sectors of the economy from industrial production to tourism. Startups in the travel and hospitality, passenger and freight transportation industry took the first blow. Since the beginning of the year, companies such as Service, Hipmunk, Starsky Robotics, and many others have already announced the closure. The income level in these industries fell by 50-90%.

Public markets collapsed almost instantly – shares of airlines (UA, Delta, American), cruise companies (Norwegian, Royal Caribbean), cinemas (Sinemark) fell by 70-90%, shares of Uber, and Lyft fell by 50-60% from mid-February. The crisis negatively affected the dynamics of startup incomes in most industries, incomes collapsed very quickly. Startups responded by firing numerous workers. For example, startup Lime – one of the leaders in the field of scooter rental – is now trying to raise the round by estimating $400 million, that is, its rating has fallen from the last values ​​by 80%.

Only some industries had the opposite dynamics of income: telemedicine, online and mobile games, infrastructure for working from home (video, project management, instant messengers), online cinemas, and other online entertainment, as well as some extent business process automation, and delivery with e-commerce. All this is reflected, including the evaluation of startups. Notion, the developer of the collaboration platform, raised $50 million in the crisis by the estimate of $2 billion already, while the previous startup’s valuation was $800 million. But these companies are now undergoing a strength test – competition in these areas has also intensified, and companies are experiencing extreme loads.

Investments while teleworking

Returning to the venture business. Of course, it fully felt the crisis’ impact. To begin with, a venture fund needs to communicate with the company live. It’s necessary, as they say, to look into the founder’s eyes, to spend time with his team. Which is impossible to do now. Not everyone can, and is ready to cross this line and start giving money to companies, whose founders they have never seen in person. About 20% of venture capital funds have decided not to rebuild and are waiting for the time, they can start working with startups in their usual mode, that is, they will not invest in new companies unfamiliar to them. Others are rebuilding and using video conferencing to communicate.

Both companies and investors understand that if before the cash stock was enough for 10-14 months, now this stock should be 20-24 months.

Many companies that were in a stage of negotiations with investors lost them – investors withdrew from non-binding agreements (Term sheets) either completely or by reducing the estimates of the startups under consideration by 30-60% and suggest that they collect more money in the round. Because of this, the shares of founders and early investors are now eroding very significantly in the current rounds.

Companies in the C-D rounds are, particularly under pressure. It is most difficult for them to “collapse” their expenses, and they, as a rule, used to steadily raise money. The crisis had less impact on the early stages of pre-seed, seed.

The funds themselves are forced to reserve more funds to support their own startups, which, in the current conditions, may not receive funding from new investors. Despite all this, for several investors who have enough money on hand, a window of opportunity is now opening up – more money in the round and lower ratings enable the funds to participate in the rounds of the best companies with top investors.

Technological transformation

The crisis caused by the coronavirus pandemic showed which areas need technological transformation, and which technologies will be in demand not only now but also after the crisis. These are smart technologies that are now receiving support from many governments. Besides, the virus has already changed the education system. Soon, we will see how the balance changes in favor of distance education. Given the additional pressure on the healthcare system, we can predict the emergence of new companies that want to enter the market in crisis or right after it.

Many early-stage startups in the Valley have already retrained and are developing remote work software, video assistants, telemedicine applications – this is also a window of opportunity for them and the strongest survivors.