COVID-19: How It Has Affected Venture-Backed Companies

October 15, 2020

To say that the COVID-19 pandemic has had a profound impact on all financial markets is an understatement. And in many regards. We are just beginning to understand what the…

To say that the COVID-19 pandemic has had a profound impact on all financial markets is an understatement. And in many regards. We are just beginning to understand what the long-term implications of the pandemic will be.

Early 2020 offered an excellent opportunity to enter a market that had been growing steadily for many venture-backed companies, and it showed no sign of slowing down. But in the matter of a few weeks, many of these companies had to shift gears quickly. Rather than seeking growth capital, they started focusing on mere survival.

The circumstances forced many companies to make quick decisions about whether to move forward with existing plans or delay them. Similarly, investors also had to make investment choices in a climate marked by uncertainty.

The United States is now over seven months into the pandemic, and there is no end in sight. Given this, we can now understand some of the most significant impacts the pandemic has had on venture financing markets.  

Investors are Still Interested

In the immediate aftermath of COVID’s arrival in the US, there was a sharp decline in the number of venture capital deals. In the months between March and June 2020, there was an overall decrease in deals by 44% when compared to data from 2019. Much of the early speculation predicted that interest in venture capital investments would drop sharply during the pandemic. It was frequently compared to the recession of 2008-2009.

But it hasn’t turned out to be quite that bad. Most venture capital firms are signaling to startups that they are still quite interested in investing, and they are optimistic about the future. Many VC firms are reporting that half or more of their portfolio companies are either unaffected by COVID or benefit from it. And many savvy investors understand that downturns can often generate some of the most promising investment opportunities. Even if the economic recovery is projected to be long-lasting, VC opportunities will likely remain high.

Some speculate that seed-stage companies are in an incredibly desirable position since investment interest is high, but they are still several years from the market. Overall, while some venture-backed companies may be reluctant to move forward with raising capital right now, given the initial speculations, those haven’t panned out. By all accounts and available data, now appears to be as good a time as any to seek capital.

Optimism Abounds

Investors are optimistic, but the pandemic has also inspired many startups. Many of these fledgling companies recognize that the world is changing. We are working differently, consuming differently, seeking education differently, and entertaining ourselves differently. Moreover, some of these changes will likely be permanent. And any period marked by rapid and transformation growth presents tremendous opportunities.

This tenet is especially true for tech startups. The pandemic caused a massive surge in demand for solutions that enabled remote working and contactless solutions. Innovative models for grocery and take-out meal delivery grew exponentially. In the world of venture capital, we all understand that not all startups will become unicorns. But in periods of massive transformation, some of them will be. And many companies are confident that they can present something better than the existing options to the market.

The Value of Different Variables

Many companies – even established companies – went under during the pandemic. Some simply didn’t have enough liquidity, while others could not compete, given the change in consumer demands and priorities. One thing that became obvious to all very quickly is that companies that were able to respond to market changes adapt to new needs, and re-tool their team in a short amount of time were in a far better position than those who could not.

Despite what the pandemic does or how long it remains, tomorrow’s market will still demand flexibility, agility, adaptivity, and efficiency – now more than ever. Investors will scrutinize these aspects of any startup. And more immediate concerns stemming from the pandemic itself will emerge, such as a focus on the stability of supply chains, anticipated demand, technological integration, and even workforce management practices. Startups should be prepared to answer tough questions on these variables because investors will be asking them.

Venture-Backed Companies and a Lingering Pandemic

Venture-backed companies have been mostly immune from the most severe economic impacts thus far, and interest in startups is high. But investors will continue to be discerning in what startups they choose to back. No matter what stage of growth your company may be in, it’s crucial to understand how the pandemic has shaped investor needs and priorities. This will help you to better position your company for future fund-raising.