By: Jesse Jones
As the COVID-19 pandemic and protests across the United States over racial injustice have gripped the world, great uncertainty remains as to what comes next in the private markets as startups and investors alike seek to find the best path forward.
At Fourscore Business Law, one of our core services is serving as corporate counsel for companies as they raise funds from angel investors and institutional venture firms. So we have been watching with great interest to better understand ongoing market dynamics and what likely lies ahead. In this post, we highlight five observations concerning how things may play out in quarters to come.
1. VC Deal Volume – Decline or Uptick?
While it’s been reported that 2020 Q1 aggregate VC deal volume remained strong overall given the associated deal lead times, many are expecting net venture deal volume in Q2 and beyond to decline. A competing perspective is that as investors seek to derisk their holdings and startups grow increasingly desperate for fundraising to survive, attractive valuations may entice investors to move beyond just doubling down on their portfolio companies resulting in an uptick in deal count – particularly once the global economy moves further into reopening.
2. Shifting from growth to survival mode – management is key.
As the macroeconomic environment continues to weaken and workforces remain largely remote, the value of experienced management becomes more important than ever as companies shift from growth to survival mode. Seasoned entrepreneurs who have weathered prior economic downturns or dramatic market shifts will be better positioned to navigate these unchartered waters. Investors can be expected to place an even higher premium on proven management experience and leadership.
3. Accelerated shift in deal terms favoring investors
After an extensive period of frothy, founder-friendly deal terms, even before COVID-19 hit, there was already a noticeable shift in deal terms as investors shifted away from prioritizing growth at all costs to demanding a pathway to profitability or at least, a pathway to revenue, from its portfolio companies. The COVID-19 pandemic likely will accelerate this pattern as companies face existential threats and investors grow more risk-averse. Some analysts have predicted greater frequency of staggered financings to bridge valuation gap disagreements and lower risk by avoiding larger rounds.
4. Capital may stay closer to home temporarily stunting the growth of developing ecosystems.
Venture capital, especially in recent years, has placed a premium on injecting capital into nontraditional ecosystems away from major investment hubs. With international travel still under constraints and concerns remaining about a second peak (let alone a second wave) of the virus, investors may try to keep their capital closer to home resulting in a net decrease in funding available in non-traditional markets. Such an aversion from investors at large, of course, could thereby present attractive investment opportunities in such underserved markets.
5. Corporate America – Beyond Buzzwords
In the wake of George Floyd’s death and the ensuing global protests against racial injustice, Corporate America has leapt into action in unprecedented fashion pouring billions of dollars into organizations and initiatives designed to combat racial injustice. Critics have been quick to point out that many of these very same companies have glaring internal diversity problems that must be addressed. In response, leading companies including venture capital firms across the United States and beyond have readily signaled their willingness to take significant action to overhaul their internal systems and hiring practices. Some venture firms have already begun announcing new funds dedicated to groups underrepresented in venture and tech from Softbank’s brand new $100mm Opportunity Fund to a16z’s Talent x Opportunity (TxO). How all of this ultimately affects and redefines the venture financing industry long-term is unclear. However, the unprecedented statements and actions taken by venture firms to date signal longer-term change to the economic and investment landscape is on the horizon.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.