Coronavirus pandemic provides parallels with 2008 for VC investors

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The market downturn and increased uncertainty surrounding the impact of the coronavirus pandemic has seen startup investors pull term sheets,
slash valuations, and pull out of deals.Many startups are laying off
staff and risk closure — but some will thrive in challenging
circumstances. Major tech companies like Uber, Spotify, Airbnb, and
Square were all founded between 2006 and 2009 during the last financial
crisis proving that great businesses can still come from a downturn. We
asked investors with experience investing in downturns what to look for
in a downturn and where they see opportunity. Click here for more BI
Prime stories.To get more news about Coronavirus forex, you can visit wikifx news official website.
Increased uncertainty surrounding the impact of the coronavirus
pandemic has seen startup investors pull term sheets, slash valuations,
and pull out of deals.Many startups will be forced into mass layoffs or
could close altogether, but others will thrive in challenging
circumstances. Uber, Airbnb, and Square were founded during the last
financial crisis, suggesting that strong startups can still weather a
downturn.We asked investors what to look for in a downturn and where
they see opportunity. “Each downturn is peculiar,” Paul Asel, partner at
NGP Capital told Business Insider in an interview. “History doesn't
repeat itself, but it rhymes. There are consistent reasons why we see
the best companies coming out of a downturn because there's less
competition, less capital available, and more time to innovate.”
Asel cites the formation of Cisco, founded in 1984, and its
development despite the 1987 market crash and the events of Black
Monday, and the success of Google amid the dotcom bust in the late 1990s
and early 2000s as good examples of companies coming through adversity.
The decisions that companies take now to ensure that they survive the
crisis will make the difference come the end, according to Michiel
Kotting, a partner at Northzone. During the dotcom bust he was the
founder of AI company Digital Jones which was later sold to “In 2001, we had to layoff two thirds of our staff but it
helped us focus and we went from $9 million in revenue to $100 million
in revenue and a sale in the next three years,” Kotting said. “Survival
is the most important thing because you want to come out of the gate
flying when this is over.”The 'batshit crazy' founders survive the tough
timesIn a downturn, personality and resilience count.“When the tide
rolls out, all that's left are the batshit crazy people that want to
start a company under any circumstances, and those are the people you
want to invest in,” said Rob Hayes, a venture capitalist at First Round
Capital who invested $510,000 in Uber's seed financing round, in an
interview with the Wall Street Journal.“You want entrepreneurs
responding to the challenge,” Kotting added. “Being creative, working
hard, and taking quick decisions are key traits for founders who are
grabbing the bull by the horns.”
There were, of course, unique circumstances that helped the likes of
consumer services like Uber, Airbnb, and Spotify. Investors cited the
explosion in the app economy and the rise of online marketplaces as key
to the success of companies founded during the last downturn.The current
batch will need to be equally adept at identifying equivalent
trends.Less capital may be good for resetting the ecosystemThe market
that emerges from the pandemic will look different to the one that came
before. There will likely be a curtailment to the mega-rounds that have
become more common.“It's been harder for VCs to invest when there are so
many tech giants casting long shadows,” Asel said. “Most of our top
investments came from the 2007-09 period and the same could be true here
where the pricing environment is much healthier. If less capital is
needed to succeed it's good for both entrepreneurs and investors.
Sectors that hold promise include educational tech and healthtech,
both sectors venture capitalists have been talking up in recent years.
Startups in these sectors are seeing a spike in usage and demand — but
were already rising in popularity, according to Reshma Sohoni, founding
partner at early-stage London fund Seedcamp, an investor in
TransferWise and Revolut. “We are still looking for long-term indicators
of growth and genuine product market fit,” Sohoni told Business Insider
in an interview. “We don't want companies that are only successful now
which have 'pandemic fit.'”Historically, there has been a 25% to 30%
drop in the number of early-stage deals after an economic downtown, and
median valuations decrease 10% to 20% per year for several years
post-crisis, according to Daniel Li, a VC at Madrona Venture Group, in a
Medium blog post. Valuations are already being slashed in startup land.
Investors have sought to regroup to better understand the market they
find themselves in, even reneging on terms or pulling term sheets for
some startups. “The bar goes up and there will a shakeup between
better-performing companies and those that struggle,” said Northzone's
Posted 20 Apr 2020

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