The following resource was shared with LAVCA by AC Ventures based on a communication they sent to their investors and partners. The statement reviews the current state of the global startup ecosystem and sheds light into challenges that both founders and investors will have to face moving forward.
Our response effort, like that of many, is focused first and foremost on the health and safety of our team. The priority, from day one, has been to follow all safety guidelines to ensure the well-being of all our team members, as well as the slowing of the spread of this disease.
Having said that, most of our time during the past weeks has been spent on working on how to navigate the COVID-19 outbreak. We have communicated with numerous different players across the VC community, and although we are a couple of months into the crisis, we still wanted to share some insights and strategies we think may be of service.
First, when it comes to the general effects that can be expected from this crisis, there seems to be consensus in the VC community around three main points:
- Fewer deals and longer financing rounds: Times of economic uncertainty breed slow decision making. Investors are leaning towards a more conservative approach. Further, with self isolation and logistical challenges during this time, face-to-face meetings are not possible, which inherently slows deal flow. Presently, there has already been a slow down in deal flow, with investors decreasing the rate of capital deployment into new investments.
- Lower valuations: Supply and demand in venture capital are shifting, quickly. Founders are worried, to say the least, and are likely to press for as much capital as they can get to navigate this uncertainty. Further, investors are raising the bar on new investments, some even halting new deal flow for the time being.
- Time it will take for the economy to recover: In general, optimist consensus is that we can expect the economy to begin to recover in a year. Less optimistic players predict the downturn will be more prolonged, and that the economy will begin to recover in two years or even longer. Whatever the case may be, we encourage all players to plan for the worst case scenario.
Considering this, we have put together the following conclusions that may be of interest for the different players in the ecosystem:
For founders:
In case you haven’t already heard it a thousand times in the past weeks, focus on extending your runway as much as possible. Last month, founders were being told to ensure a 12 month runway, at the least. Given recent happenings, however, this is not enough. Consider extending your runway to 24+ months. The worst thing that could happen is that you were too conservative. Remember, this is a time to focus on survival, retaining current clients, and growing with limited resources. Sequoia Capital’s Matrix for COVID-19 illustrates possible lockdown scenarios and potential strategies startups may implement, shown below:
Source: Medium “Sequoia Capital’s Matrix for COVID-19“.
For investors:
First and foremost, focus on your existing portfolio. As many investors in the community, our team at AC Ventures is committed to assisting our founders in any way possible, and working with them to help to achieve the desired runway extension and reduction of cash burn. Support is needed, now more than ever.
When it comes to new deals, while some of you may be inclined to pull out of investing during a downturn, history has shown us this may not be the best reaction. Some of the best companies have risen in the midst of an economic downturn, such as Uber, Google, and Amazon to name a few.
While we most definitely do not encourage impetuous behavior, we do believe that there are opportunities to be taken from this time. Hence, as many investors in the ecosystem, we continue to actively look for investment opportunities, focusing on early-stage startups with solid teams, attractive business models and disruptive technologies remains. Further, we encourage everyone to exercise fairness when it comes to valuation, and to focus on building long-term relationships rather than taking opportunistic approaches. Finally, portfolio diversification is recommended to be a priority among all investors in order to lessen the effect of this global crisis.
We are aware these are difficult times for everyone. However, it is important to remember that humankind has proved to be resilient and adaptable during times of crisis. Some of the biggest innovations have come from moments of tremendous stress, and new opportunities arise from drastic changes in people’s lives. We are confident that we will all come out of this crisis stronger and continue to support each other along the way.