COVID-19 is shaking up the markets, and we’re seeing more uncertainty in the public markets than we have since 2008. As observers and service providers for the private market, though, we don’t have nearly as much publicly available data as our public-market counterparts do. Neither does anyone else in the space.
We recently had the chance to share our own observations about the impact of COVID-19 with the NVCA members. But that was just our take—following that presentation, we asked the VCs on the call for input about the effects the novel coronavirus will likely have on their investment strategies. Here are the 4 key takeaways:
1. VC investments will likely become somewhat more conservative
Among the VCs who responded, a little more than half thought they would write fewer and smaller checks, although almost half predicted no change. We translate this input to a ~25% overall reduction, reasonably, in the number of checks issued.
More interestingly, though, a vast majority expected to invest at smaller valuations. Even though our respondents were split on the question of whether or not their own investments would become more conservative, almost all of them thought that the market (including other private investors) would rate potential investments more conservatively. Localized optimism is somewhat tempered by generalized pessimism.
2. VC funds want to help their investments through this, from a strategy standpoint
About 80% of our respondents were in touch with their PCs to offer guidance and hear grievances—it’s clear that VCs in general still want to help their companies succeed. That said, a proportionally small number had gone as far as to guarantee future funding. It seems like the community is interested in making sure their investments survive for the long term, but not banking on it.
3. VCs—at this point—think caution is the best plan
Overwhelmingly, our VC respondents were of the opinion that their portfolio companies should (at least for the moment) play it safe and make no sudden moves. Cautiously advancing core business was the name of the game for 80%, and that aligns well with the game theory we can forecast for the private markets as a whole:
If everyone is aggressive, we all burn capital. If everyone is too conservative, the market dries up. It seems like—and VCs seem to agree—playing it close to the chest for the moment is the best way for both specific companies and the market as a whole to get through this downturn without going into total panic mode. However it should be noted that some sing the mantra “Buy When There's Blood in the Streets”—14% said they were advising portfolio companies to “move fast when others and win market share while others are fearful.”
4. It’s unclear how the last six months’ valuations should be adjusted
As valuation professionals, we at Preferred Return understand intimately that the Fair Market Value of a company (or the securities it breaks down into) are only estimable in context of the market. So when the market goes through a significant adjustment like this, what should happen to recent independent valuations?
It turns out, over half of our respondents weren’t sure. That makes sense: the second and third derivative impacts of change in the markets are not apparent to everyone, and given that this is our universe, we find that it’s our job to be present and wary of these impacts.
Our two cents: the COVID-19 market effect constitutes a material event for all private investments. Startup management teams can both give a better equity deal to their employees and prevent venture-killing downrounds by dealing with this now and reestablishing Fair Market Value in the context of the new market dynamics. While much remains uncertain, we don’t see the market pretending this episode in history didn’t happen, and we believe that companies and their investors will begin to act accordingly.
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