Founder & CEO at DX Medical Solutions, creating healthcare systems for a better tomorrow.
This year has taken everyone for a loop. Regardless of anyone’s 2020 plans, the Covid-19 pandemic has changed everything. The virus outbreak has strongly affected businesses, closing some and forcing changes in many day-to-day operations for corporations, as well as the startups and small businesses that have survived the roughest periods of Covid-19.
Private investors and venture capitalists (VCs) in particular are reconsidering how they choose to contribute to startups, for better or for worse. Many have decided to invest in their current portfolios rather than beginning business partnerships with new companies. It’s important to understand these changes because they will have lasting implications on the fundraising landscape for both investors and founders.
Q2: This Year Versus Last Year
Last year at the end of the second quarter, things looked pretty different according to Crunchbase. Q2 of 2019 projected $69.8 billion (-1.2% quarter over quarter, -17.5% year over year) of investments across all stages, with average funding at $10.25M. These numbers are lower than expected, as previously, yearly investments figures had always trended upwards. As 2019 wasn’t an outstanding year for investments, we look to historical markers to make an evaluation. As John Mauldin noted in his 2019 Economic Outlook, a recession was imminent. Not only were we in the late phase of an economic cycle, but the period of economic expansion we were in was the second-longest in U.S. history. In retrospect, this means we should have been girding our loins in anticipation.
How did things compare this year? Well, as the 2020 Q2 numbers report, there was a total investment of $69.5 billion (+17% quarter over quarter, -2% year over year) across all rounds. It must be noted that one particularly large raise skews the overall data; removing deals made by Reliance Jio, an Indian mobile network operator who raised multiple billion-dollar rounds, the investment numbers come to -9% quarter over quarter and -23% year over year, a pretty sharp drop from last year’s Q2. We have to consider in this period that the spread of the Covid-19 outbreak was rolling into full swing in Europe and was just beginning to come to a conclusion in China, so it’s not surprising to see the numbers take a sharp downward turn.
Q3: Last Year And Questions For This Quarter
Q3 in 2019 reported a worldwide $75.6 billion was invested over 9,100 VC deals with an average round size of $1.5 million, an increase of 7.1% quarter over quarter and 15.4% year over year. The relative increase from quarterly and yearly precedents indicates that 2019 had the potential to grow even more. The reality of 2019 is that although there were plenty of investments, the number had dropped slightly from 2018. This might have been the indicator of a recession that economists were unable to identify, as Mauldin might have pointed out. With more deals but less capital invested, it seems investors may have been diversifying interests to strengthen their portfolios.
This year’s third quarter has seen the subsiding of daily reported outbreak cases, particularly in countries where strict lockdown measures were imposed and followed. This might be an indicator that startups and investors are lacing up to get back into the game, but they will be cautious. Because economic and health conditions are still unclear for the winter and a vaccine timeline is uncertain, startups should not count on investors reopening their checkbooks so quickly. Looking at last year’s third quarter, can we make out a trend for what this year might look like? Likely not. Although the quarter-over-quarter and year-over-year numbers are trending upward, times such as today are still too volatile. One upswing of Covid-19 cases could throw off the entire prediction, and investors may be still undecided about pouring funds into new startups.
What Does This Mean?
For founders, this means that you have to focus on bootstrapping and cutting costs wherever possible, the same way a body does when it goes in starvation mode. It will eat its own organs, in order to preserve the brain and keep it functional. Founders will have to go back to tight budgets and ride out the storm until investors have the ability and comfortability to invest again. From my experience, it is best for founders to reduce any redundant staff where possible. I understand it is not a popular take, but instead of paying someone $3,000 per month for social media graphics and strategy, founders will need to do this themselves.
For investors, now would be the time to place yourself in a position where you can leverage a good equity stake in an already established and on-track-to-be successful startup. Startups are in dire need for cash, and now you might be able to turn a relatively small investment into a 10-times multiple in a couple of years. Investors have an incredible position currently to leverage a relatively small amount of capital for a great percentage of a succeeding startup.
In such a tough and unpredictable period, some industries have managed to not just scrape by but grow in relevance and size. Some businesses and startups in medical technology saw a boost, as did grocery and meal delivery services and CBD distributors, to name a few. Regardless of demographic, the pandemic has shifted the way investors look at startups and are looking for more advanced startups to invest in rather than pre-seed mainly idea-based companies. What the future of startup investments holds is uncertain, but founders should know that getting to the next financial step is not going to be easy for the near future.
Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?