The unexpected outbreak of the coronavirus has brought uncertainty to global financial markets. All major global economies are set to be severely affected by this crisis, and over 170 national economies are projected to shrink in 2020, according to IMF. Central & Eastern European countries are no exception - regional startups are bound to experience the consequences of a recession.
We have asked professional investors:
Marvin Liao - angel investor, ex-Partner at 500startups and startup mentor,
Jan Habermann - Partner at Credo Ventures,
Ewa Chronowska - Partner at Next Road Ventures and Founder of Vestbee,
Maximilian Schausberger - Managing Director at Elevator Ventures,
Borys Musielak - Founding Partner at SMOK Ventures and co-founder of ReaktorX,
to shed some light on how the coronavirus pandemic is likely to affect the startup ecosystem, VC funds, startups and their market valuations.
Marvin Liao: I think COVID-19 is one of the biggest events to hit the global economy and startup land in the last 20 years, and quite possibly in our lifetime. It's going to be a big reset for companies of all stages. Thus, I expect it to be an extinction event for most startups, and I expect money to become scarce. In my opinion, this situation is also a huge opportunity for investors and startup founders, in a way that there will be a massive change in consumer and enterprise buying behaviour. Any company which survives in the next few years, will be well-positioned to increase its market share and dominate its markets.
Jan Habermann: Many investors will likely be more cautious and slow down their investment pace in the coming months due to the uncertainty. They need to preserve cash for their existing portfolio. Thus, not having sufficient funds to invest, and being unable to raise more capital, funds are likely to limit new investments. I have no doubt, however, that great startups will always have access to sufficient capital. In the past, recessions saw the rise of some of the greatest companies, and we definitely carry on investing since venture is betting on the future of the market.
Ewa Chronowska: The overall impact of the current situation on the startup ecosystem is going to be severe, and will not spare the things many have taken for granted, such as the availability of capital, steadily growing demand, abundance of jobs, and so on. According to a global startup survey conducted by Startup Genome in April, 74% of startups saw their revenues decline since the beginning of the crisis. The available data on the current state of the global startup ecosystem (where 41% of startups has less than 3 months in cash runway), coupled with an overall negative economic outlook, indicate that it should brace for impact whose magnitude is still unknown. On the other hand, every crisis creates opportunities, and at the end of the day, survivors of the COVID turmoil should emerge as potentially massive winners.
Maximilian Schausberger: According to a recent study by Raiffeisen, it seems that the relatively late arrival of the virus in Central Europe, and measures undertaken by governments, have prevented a wide spread of COVID-19 in this region. The actual impact of COVID on the startup ecosystem in the region is hard to predict as most of the economies are still under partial lockdown. That is why we need to carefully monitor and analyse all data emerging during the gradual re-opening of the economies. Only in a few months’ time will we be able to assess the long-term impact of the pandemic on the startup ecosystem in the region.
Maximilian Schausberger: Valuations and risk-premiums will be adjusted according to the macroeconomic environment.
Marvin Liao: I believe valuations are set to come down at least by 30-50% over the coming year. Flat is the new up round.
Ewa Chronowska: In the coming months, I expect further downward adjustments on companies’ valuations, and startups won’t be an exception. The magnitude of changes will be highly dependent on the maturity and profile of a particular company. It is important to realise that approximately 90% of all industries has been negatively affected by the current situation, and as showed by data coming from China and other countries which gradually re-open their economies, the nature and speed of economic recovery will be much different from what the markets anticipated even a month ago. The worldwide lockdown is an unprecedented phenomenon which is going to reshape and redefine global economies, supply chains and customer behaviour. High levels of uncertainty (in my opinion noticeably higher than during the crises of 2001 and 2008), on the one hand temporarily decrease the appetite for risk showed by some VC, and significantly increase the pressure on premiums expected by VCs which are still actively investing. We already observe valuation adjustments by some 20 - 30%. It is certain that in the months to come, we will see many failing startups, severely impaired business growth rates, diminishing sales and a decline or profound changes in many industries, a further impact on the valuations is to be expected. This will be especially the case for more mature startups with existing product market fit and a certain critical mass to sustain. The reason for that is simple. The bigger and more mature you are, the harder it gets to pivot and adjust the business to the rapidly changing rules of the game. As a result, we witness a quite extraordinary situation whereby pre-seed companies are in a better negotiating position than startups at later stages.
Jan Habermann: I don't expect that the current situation related to COVID-19 and the consequent economic slowdown will have a substantial impact on early-stage startup valuations. The valuations at the seed stage are not typically derived from the current situation. Investing in the seed is much more about future potential. The data we have from the economic crises in 2008 and 2000 also confirms this. Seed and Series A valuation had been impacted very little. Contrary to early-stage startups, Series B, and especially Series C and later valuations, dropped substantially showing correlation to public markets.
Borys Musielak: I expect that the valuations at the seed stage will be slightly cut, but I don't think this will significantly affect top entrepreneurs. Top venture capital funds in each market tend to invest in top founders, and they will keep investing. Partners at those funds know that venture is a long-term business, and recession is a time to make their best deals at the best price, not to back out. The second and third-tier founders or first-time founders without a track record, will be hit the most, not just by the falling valuations, but also by the inability to raise funding at all. It's simply because they usually raise capital from second-tier funds that are less risk-prone, and have a tendency to put investment on hold in uncertain times. Unfortunately, the later you are as a company, the worse it gets. Later stage funds are generally more conservative in their decision-making process, and a lot of them are going to choose to wait. But there will also be some outliers who choose to go aggressive and get into the companies they have always dreamed of, cheaper than ever before.
Ewa Chronowska: In a nutshell, what startups can do in order to stay afloat during and after the COVID-19 induced storm is the following: as coming months are crucial for the survival of many companies, cut costs wherever possible and stretch the runway. Reasonable cash management and remodeling businesses / processes are crucial. Securing financing is also a must, so startups should continue with fundraising. Online is the new way to fundraise, so matchmaking platforms, virtual startup competitions and digital events come in very handy. Once the dust settles, we will start defining the new normal where remote fundraising, especially at the early stages, will definitely stay with us for good. Actually, it’s something we’ve been doing at Vestbee for a long time - long before the coronavirus outbreak.
Borys Musielak: What if you are an early-stage founder with an amazing business idea but no track record and you can't get funded? I believe the upcoming months and years will see the rise of remote accelerators. The world's top programmes are opening up for remote cohorts, and it's never been easier to get into yCombinator, TechStars or 500 Startups from wherever you are. Consequently, smart founders will use that opportunity to build their network and get in a position to raise capital from top funds.
Maximilian Schausberger: For startups seeking VC investment, I would recommend approaching VCs located close to the startups’ region which have expertise in the given industry. Thus it is even more important, in times of uncertainty, to have investors on board who can realistically assess the risks and opportunities in a particular business segment, and provide insights in industry developments relevant for the startup. At Elevator Ventures, we currently seek founder teams who use these extraordinary times to stick out of the crowd, by conveying a convincing vision for sustainable growth building their business forecasts on reasonable scenarios based on economic circumstances. These teams will be able to raise fresh capital over the next months.
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