In the world of permanent change sparked by the COVID-19 outbreak, the following unemployment spike, and social unrest, it is easy to forget that every crisis can be seen as an opportunity. But staying above the surface requires pivotal changes and new approaches, especially in the ever-changing ecosystem of VC and startups.
With harsh conditions and challenges to overcome, a crisis can be seen as a trigger for building new business paradigms, solving problems that emerge, and transforming companies in a way before unseen. But this crisis is like nothing we have seen before.
Issues related to the investment strategies will be covered during our panel discussion with online networking: How to raise VC Funding in Times of Uncertainty.
This text covers:
- The economic impact of the COVID-19 pandemic (in brief)
- Hard facts about Venture Capital during COVID
- List of 5 VCs that have kept investing despite the crisis
Due to the impact of coronavirus, the first quarter of 2020 was the first in the US since 3Q2008 to witness a GDP decline, with a 5% shrinkage compared to 2.1% growth in the last quarter of 2019. Also, the unemployment rate in the US has spiked more than ten percent from 4.4% in March 2020 to an astonishing 14.7% in April 2020. For more than a decade, the unemployment rate in the US has been kept below 10%.
But the US was not the only one to be hit by the economic repercussions of the lockdown. The European Commission predicts that the EU economy will drop by a record 7.5% while the unemployment rate is predicted to grow from 7.5% in 2019 to 8.5% in 2020.
The crisis is also seen in the startup and Venture Capital landscape but in a slightly different way.
The chart above shows that the number of investments by Venture Capital Funds significantly dropped in April and May 2020 when compared to April and May 2019. Considering only this one aspect would indicate a severe crisis, but that’s not the whole picture – not even close.
The overall value of investments in the COVID lockdown remain seemingly unaffected – April 2020 came with higher investments than April 2019 while the value drop in May looks more like a natural fluctuation than the effect of a global pandemic and the following social unrest – or with the 5% GDP drop combined with 10 percentage point rise in unemployment rates. But that’s not the complete answer to what is happening with investments during the recession.
The chart above shows the average value of Venture Capital Financing in the April-May period of 2020 compared to April-May 2019. The average value of a single investment shows an enormous growth – over twofold in April and nearly as high in May.
To provide some clarification to this complicated and surprising situation, Julia Lipton, founder of Awesome People Ventures, states that:
‘Covid-19 makes obvious what we’ve known all along: Money is power. Venture capitalists will fund the next generation of multi-billion dollar companies. With that comes the ability—and, some might argue, a human obligation—to fund a better future. I’m optimistic that VCs will invest more intentionally towards building a better future.’
Julia Lipton, World Positive Investing
So, investments haven’t been halted during the harsh times of COVID-induced unrest. There are multiple reasons behind that, starting with the continuation of late-stage investment rounds to a more elusive yet pivotal change in what venture capitalists look for in the overall paradigm – focusing on delivering a greater value than only capital return.
But on the other hand, startups are in an even more difficult position than they used to be before the pandemic. Finding an investor that is not only willing to risk money in these difficult times but will also provide support for a startup to survive this period is like looking for a needle in a haystack (while it is on fire).
This situation forces a new approach on startup owners – VCs will reduce their initiatives and, thus, looking for startup funding (especially in the early stage) will be even more challenging. It’s a good idea to check which professional investors are active at the moment. That’s why we have delivered a list of the top VCs that have kept investing through April & May.
Andreessen Horowitz : 26 investments (with 20 as a leading investor)
Known as a16z, the company invested and exited Facebook, Slack, Oculus VR and Skype and continues as an active investor in Asana, Stripe, TranswerWise and Coinbase. They are stage agnostic and have $12B in assets under management across multiple funds. In 2019 they changed their status from a venture capital firm to a financial advisor.
What stands out in their approach is that they actively help out their portfolio companies in business development by providing advisors in such areas as sales, marketing and finance. In times of crisis, it seems such hands-on help for the founders is worth more than the checks they write.
In response to recent events, the company has launched the Talent x Opportunity fund on 3rd June that aims to invest in founders that “have the talent, drive, and ideas to build great businesses but lack the typical background and resources to do so.”
Sequoia Capital: 23 investments (with 7 as a leading investor)
Sequoia Capital was founded in 1972, before the term ”‘venture capital” was coined. The firm has invested in over 1000 companies in such iconic brands as Apple, Google, NVIDIA, Atari, EA, Airbnb, Youtube, and Zoom, to name just a few.
In March 2020, Sequoia Capital announced that it is opening a fundraiser of about $7bn for its latest set of venture capital funds, testing investor appetites for technology start-ups in the US and south-east Asia as a response to the coronavirus market damage.
Lerer Hippeau – 7 investments (with 1 as a leading investor)
Lerer Hippeau has supported Allbirds, Glossier, Giphy (sold to Facebook just a few weeks ago for $400 million), BuzzFeed, Soylent, Warby Parker and Casper, among others.
Apart from funding, the company provides a platform where startups they invest in can learn about marketing, sales and gain other knowledge about business that early-stage entrepreneurs usually lack.
Stephanie Manning Cohen, Director of Platform at Lerer Hippeau, will share more insights about this topic, the support investment funds provide, and the general strategy she advises in a COVID-affected time during our webinar about How to raise VC Funding in Times of Uncertainty.
DNX Ventures – 4 investments
DNX Ventures focuses on B2B startups that aim to change the way people live and work. The company supported the online meeting platform Banzai, PayStand B2B payment provider, and Diligent Robotics, among others.
The unique value delivered by the fund is their ability to connect a B2B startup with their first corporate client to validate the product and give testimonials to support the company’s market entrance. The fund also organizes meetings where promising startups (be they supported by the company or not) can show their product and share their vision with potential clients.
More knowledge about these investment strategies and approach in the times of COVID will be shared during our webinar about How to raise VC Funding in Times of Uncertainty by Natsuki Zihnioglu, Head of Portfolio Platform at DNX Ventures.
NFX – 8 investments (with 4 as a leading investor)
NFX focuses on investing in companies with strong network effects, based in the US or Israel. The company responded quickly in the face of the pandemic by launching a program for startup founders in mid-April. Companies could apply for $1-2 million in seed funding in exchange for 15% of the equity with a guaranteed decision in 9 days or less.
The submission phase is now over but the company is planning to launch its next rounds in the near future.
What all the investment funds listed above have in common is strong support provided for companies. This takes the form of mentoring and business advisory which build a stronger impact of Venture Capital in the landscape of a global economy.
If you want to get more information about venture financing and investor funding for startups during the time of COVID or other crises, sign up for the upcoming online panel discussion! Experts from the funds mentioned above will share their knowledge and show possibilities as well as some good fundraising practices on real-life examples.