Is it better to raise capital now, or to wait for the investment climate to improve?
We are frequently asked by technopreneurs looking to raise capital what the chances are of reaching their objectives in the current climate, or whether it might be better to wait for the investment climate to improve.
We are still in very early stages of this period of uncertainty. As investors wrestle with how to protect their portfolios from the economic impact caused by the pandemic, we see a trend of investing wisely rather than aggressively.
According to Pitchbook’s newly released European Valuations Report 1Q2020 “pre-money valuations across the financing stages remained resilient amid the emergence of Covid-19. However, most VC deals were conducted prior to disruption, and valuations are expected to cool or fall as the year progresses. Valuations tied to new angel & seed and early-stage rounds could fall as managers shift their focus inwards towards existing portfolio companies. Rapid late-stage valuation growth is expected to taper during the recessionary environment.”
Based on CrunchBase analysis from the past three months – March 18th to June 17th – other than health-tech companies, the rest have seen a decline in Series B check sizes. This shows investor conservatism with funding in the near term likely to be used defensively to plug costs, manage demand-side falls and prevent funding gaps crippling mature startups that will have to taper cash burn rates, rather than investment for growth.
We all intuitively understand that there is pull back in a downturn. Further Pitchbook data shows that those funds that were investing steadily throughout 2008 – 2010 period, which was the height of the recession and uncertainty, tended to have better performance than funds that were investing not. Investors have taken the lesson from 2008 crisis to heart this time; we hear more investors’ sentiment to keep their eyes open for promising startups, while preserving dry powder for existing investments.
We believe that post Covid-19 investment trends will mostly resemble the opportunities that have driven equity markets for past few years, ONLY accelerated due to changing customer demands, need for cost efficiencies and automation.
Of course your investment prospects will be looking even better now, if you are in the technology sector niches that will be fast forwarded as a result of the new demands of the world such as in Data, AI, HealthTech, FinTech and the Future of work.
Covid-19 is expediting digitisation of health and banking sectors, driven by changing consumer behaviours, adoption by the providers and practical need for more efficient operations. Wellness and connected device solutions for preventative healthcare, will be a focus to shift our healthcare systems from cure to prevention. Artificial intelligence (AI) models and explainable AI will play a key role in improving customer experience, personalised solutions and automation (as required) across multiple sectors such as health (prevention and cure) and finance. We expect lot more innovation in Future of work, as businesses identify the right balance post pandemic.
Whilst investors are being more cautious, with processes sometimes slower, and valuations sometimes lower, deals are still being done, and this is expected to continue until at least the end of the year, but likely well into next year. The recommendation in most cases, therefore, is to go ahead, unless you are able to wait for up to a year. If you are in one of the “charmed” categories, then the decision is of course easier.
