As economies globally went into lockdown in March, the startup ecosystem was required to take immediate and swift action to ensure survival. Founders and management teams needed to make difficult decisions. Investors in these businesses naturally refocused all efforts to ensure their portfolios had support, financial and operational, to adapt to a quickly changing macroeconomic environment.
Looking forward, the venture investment market will inevitably see a slowing down of deals in the coming weeks and months, with an expectation of an uptick in activity in the Q3 or Q4. Although the immediate slowdown in activity is not unexpected, the venture investing market is likely to see some broader thematic changes despite the unprecedented amount of dry powder in the industry globally.
- There is likely to be downward pressure on valuations
- Deal terms are likely to be more skewed in favour of investors (for example, liquidation preferences)
- Investors will prioritise profitability over growth
- Experienced management teams will be favoured over first-time founders
- Deals will generally take longer to complete
- Industries which are benefiting from COVID-related macroeconomic changes will receive greater interest and attention (for example, healthcare and remote working)
Whilst the tightening of the venture market may seem dire, innovation will by no means slow down and opportunities will abound. In fact, some of the most successful venture investments were made in businesses founded during recessions, the most recent well-known examples being Uber and Airbnb which were both founded during the great financial crisis.