This article focuses on VCs and their action patterns during economic slowdowns / recessions including actions taken to shield their investments, especially the most promising start-ups in their portfolios.
Promising start-ups are defined as those able to offer something new or something unique that has a potential to change how our lives evolve. Examples include new payment platforms that simplify banking services, low latency streaming services, semiconductors
for data centres offering additional support to machines and Earth observation systems that promise to deliver photos of our planet in real time.
Start-ups can be either Capex or OpEx oriented. At an early stage, companies with a larger CapEx require substantial financial support and patience from investors. Companies focusing on add-on services invest more in sales and partnerships. Both must follow
pre-agreed plans with their investors and spend resources accordingly as every decision that requires further resources is heavily scrutinised. Financial discipline can be a problem during ordinary market conditions, but becomes a massive issue in a crisis.
Most of VCs have experience from previous crises and aim to use that knowledge to mitigate the danger of losing portfolio value. However, the risk scenario associated with a pandemic is different than the risk associated with previous financial crises, as
during a pandemic the situation changes every day and there is more uncertainty about when (and how) it will be resolved. Consequently, VCs have been assessing the risk associated with every investment in their portfolio almost on daily basis, as the situation
updates. The risk assessment comes in several stages related to planning, market monitoring, refinancing and – where necessary – encompassing a set of defensive actions.
All industries and regions have been affected by the Coronavirus pandemic. Some being affected more than others. Companies providing Hospitality and Travel, Retail, Manufacturing and Suppliers (offering non-essential products) and TV and Movie Producers
are struggling. On the other hand, industries such as Pharma, Retail (Online, Food and Beverages), Telecoms and Defense are affected less or – in case of Pharma and Retail – have gained on the outbreak. Other industries are affected based on their exact profile,
e.g. Cybersecurity is gaining vs 5G provision may be delayed; stage of maturity, e.g. offering subscription services vs being market entrant; and country of operation and manufacturing.
For companies operating in severely affected industries, discussions on business sustainability and required cash levels to survive are ongoing. These businesses will look at reducing their overall cost. That takes the form of management taking a pay cut
(often between 50-100% of basic salaries), business contracts being renegotiated and dropped where possible, employees being put on furlough and non-essential roles being eliminated.
Meanwhile, a thorough analysis of each investment allows VCs to prepare their shareholders for value volatility and potential delays with exits. VCs with diversified portfolios may be able to ease potential losses easier than specialty investors. Investors
with safeguards on FX risk and interest rate cuts are also in a better situation.
Finally, as the chase for new funds is getting tighter and companies start running out of cash, some start-ups will go bust or file Chapter 11 if they are luckier. As recent examples demonstrate, even companies with sound business plans, experienced management
and very high levels of investment face risk. Unfortunately, sometimes it’s about having a bit of luck.
For businesses that are rich in cash, the situation creates an opportunity to skip months of organic developments by acquiring potentially breakthrough technologies from suffering peers, strengthening salesforce and overall businesses. Data from Crunchbase
shows that during the first week of April, 272 funding rounds were closed raising US$10.5bn and the same source recorded 123 acquisitions worth over US$21bn. Some recent investments are shown in the following table.