Seed Stage Funding Disruption from Covid-19

As noted in our prior post two weeks ago (here, towards the end), one outcome of the Covid-19 pandemic could be a significantly more difficult capital raising environment which could threaten startups and early stage companies.  A lot has transpired since that post, including the continued decline in public equity valuations, but the magnitude of the impact on the early stage venture market is not yet clear.

CBInsights notes that startup funding has already been impacted (see here & here), estimating a decline of 22% for Q1 2020 vs Q4 2019.

Samir Kaji, a successful venture banker & angel investor, cautions new fund managers to expect disruption even though early stage markets typically lag public markets by 18-24 months (see here).  This will impact early stage capital availability and valuations to some degree – but how much is unknown.

Tom Tunguz of Redpoint took a historical look at seed stage funding (see here) during the 2008 financial crisis.  During the 2008 crisis, seed stage funding was impacted the least of any stage, but seed stage financing fell by 50% (& recovered quickly).  Most of that was due to smaller deal sizes & lower valuations, not by fewer deals.

Some VCs are recommending startups conserve cash (see here):

What we are witnessing is possibly a once-in-a-lifetime event, which will, almost certainly, deliver the global economy a supply- and demand-side shock of massive proportion. We have warned all our portfolio companies early February to raise capital as soon as possible and focus on breaking even.

The combination of pandemic uncertainty and its economic damage are likely resulting in a re-focus on existing portfolio companies.  PE may be the same, according to McKinsey (see here).  And as public valuations tank, independents, family offices & angels may be moving more to the sidelines, taking a cautionary approach to early stage investing until there is more certainty, which could be quite a while.

There is one consistent theme, as noted in our prior post: startups should plan to weather the storm and conserve cash.  Some helpful commentary:

The Virus Survival Strategy For Your Startup – on startup contingency planning

Estimating the Impact of the Coronavirus on Growth – a modeling how-to

Of course, all of this discussion ignores the potential for seed stage opportunities at favorable valuations that will exist for confident investors willing to invest in uncertain times and continue to support investments into the future.  This discussion also ignores the potential for Insurtech & Fintech deals that might benefit from more non-traditional distribution as a result of the pandemic.  More to come on this.

Innovate Insurance – Innovation & Entrepreneurship in Insurance

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