5 Ways This Crisis Is Changing Venture Capital Investment Strategy
Free Book Preview Money-Smart Solopreneur
The effects of the global health crisis have been far reaching. Across every country and almost every industry, there have been declines in productivity and income, bringing the economy of the world almost to a halt and leading to unemployment on a scale that has not been seen in decades.
Still, business must continue, and for that to happen, investment deals must continue to be made. As with other sectors of the economy, things are just proceeding differently than they did before this crisis. Whether you’re an investor, founder or simply someone interested in how investments will play out, here are some of the most important things to keep your eye on:
1. Increased competition and less cash
For all companies, even the ones that are in resistant sectors, there is going to be tougher competition for the investor funds available. Many investors are hedging and keeping their investments restricted to only a few high-potential companies, which is understandable given the prevailing economic climate.
There are two options for startups – The first is to continue to bootstrap and try to survive this period without getting funding, and the second is to spruce up pitch decks to compete with other startups seeking funding now.
2. Shift to necessities
It goes without saying that in times of crisis, people begin to conserve their funds, choosing to spend more on necessary items like food, clothing and shelter as opposed to luxuries. As a result, some businesses in the food industry have continued to operate and serve customers, albeit often with significant shifts in their business models, such as moving from sit-in restaurants to delivery-only services.
Naturally, investors are attracted to such resistant sectors and businesses, which explains why although quite a few major investment deals have happened before the outbreak, such as the acquisition of Jimmy John's Sandwiches by Buffalo Wild Wings owner, Inspire Brands, many others have been made more recently as well.
3. Reduced valuations
For startups that choose to seek funding in this period, one crucial factor to keep in mind is that valuations are likely to be reduced across the board. Traditionally, valuations have generally been impacted by the economic conditions of the time, and this crisis is likely to have a more significant depressive effect than other downturns.
Ultimately though, valuations happen on a case by case basis, and startups with exceptional models and attractiveness to investors might still be able to negotiate great terms.
4. Social entrepreneurship
Beyond the impact of the crisis on companies as corporate bodies, there has also been a terrible impact on individual employees, with the US reporting the highest unemployment rates since the post-World War II period. Many companies have made donations and taken other steps to cushion the effects of the crisis on their employees and host communities.
Apart from the philantrophic intent, businesses seen as being conscious and helpful are getting a reputational boost. For instance, this survey showed that more than half of Americans would buy a local product even if it costs more, to support the economic recovery. That is likely to affect investment perspectives as well, since investors will be looking to support businesses that solve some societal problem, thus boosting their reputations and also cashing in on the attendant financial returns when things return to normal (or as close to normal as they will).
5. Fintech and e-payments
With social distancing regulations in place across most of the world, the use of cash has become even more redundant. Fintech companies that facilitate transactions with little or no contact are growing significantly.
Beyond merely being resistant to the economic shocks of the crisis, investors are looking to the Fintech sector as one that might actually grow in the short and long term. After all, they facilitate the sorts of safe, efficient, cashless transactions that are required now and will likely be the predominant norm after the crises passes.