Initial thoughts on the affect of COVID-19
As I am sure you know, COVID-19 is a system shock that will have significant impact on the global financial markets. The border restrictions put in place by the New Zealand government will have an impact on the local economy and push it into a short-term recessionary state. All of these things will place pressure on startups for the next 12-18 months. Here are some of our thoughts on how this this might affect early stage companies:
How COVID-19 might affect the startup market
- Founders will be challenged with longer fundraising cycles and accepting slightly lower valuations than previously expected (we are expecting an approximate 10% decline in valuations).
- Well capitalized startups may decide to draw down on existing lines of credit or seek to open new ones.
- New Zealand’s corporate VC’s whose core balance sheets are directly impacted by COVID-19 may reduce their program or retract it entirely
- We expect startups to reevaluate their burn, runway projections and their revenue targets.
How COVID-19 might affect the venture capital market
The venture capital and startup markets are in symbiosis with each other and share many of the same opportunities and pain points. VC-specific factors might be:
- Early stage capital deployment into startups may not see any impact in methodology or pace for the rest of 2020 and early 2021. Activity may be slowed down as a result of travel restrictions and not necessarily financial concerns. During the Great Recession, deal activity did not drop significantly until 18 months after the instability had begun.
- The New Zealand startup funding market is still heavily reliant on the angel investor community and a small number of local funds. The angel community will likely see some contraction as they start to batten down the hatches on their high-risk investments and preserve liquidity.
- Offshore funds that have recently raised new funds will be deploying in a potentially more conservative fashion but also looking for opportunities to invest into new startup markets, like New Zealand.
- Due Diligence may take longer to complete as VC’s reduce in-person meetings with startups. For the next three months we expect all initial pitch meetings to be held virtually.
- Traditional sources of LP capital may take longer to close than before.