Covid-19 has been dubbed one of the greatest “Black Swans” of our lifetime. An unforeseen, unprecedented global event, impacting all corners of the world, and every aspects of our lives. The financial impact of this crisis is now beginning to come into view. Economies, public markets and Venture Capital (VC) markets are readjusting to limit the economic fallout.
Changes in the VC landscape
Unsurprisingly, in the VC environment, both investors and target companies have been heavily impacted. Global VC investment remained fairly robust in Q1 of this year. Companies raised $61bn across 4,260 deals. This was largely propped up by a strong pipeline and still came in lower than previous quarters. A downturn that is likely to continue for the remainder of 2020, at the least. When VCs do look to invest, they will no doubt adopt a more measured and scrutinous approach, seeking to validate profitability and a company’s ability to weather future storms before signing on the dotted line.This period of extreme disruption also comes with great opportunity. And we’re beginning to see glimmers of this in the entrepreneurial ecosystem.
Nevertheless, this shift towards conservatism comes coupled with changed priorities as VCs continue to seek out opportunistic investments. In particular, digital, non-discretionary demand and our new social norms (e.g. remote working, teleservices and digital payments) will guide future investments, enabling well positioned companies to thrive. Already, we are seeing healthcare, streaming, gaming, e-Commerce and most Software-as-a-Service (SaaS) companies outperforming the market. As Covid-19 accelerates existing global trends and reshapes consumer spending, this will only increase.
Tracking the trends
Grocery and meal delivery startups have boomed during global lockdowns. Social distancing measures will continue into 2020, so this trend will only increase. London-based startup Oddbox has seen sales soar, and after successfully securing €3.2m funding in March this year, they are looking to rapidly scale their offering UK-wide. Consumers are also seeking new alternatives to eating out through D2C recipe boxes, such as Pasta Evangelists and Gousto, which reported a 70% increase in sales in Q1’20, leading to a successful capital raise of $41m last month. As the uncertainty of restaurant closures continues to dampen Deliveroo’s market standing, investment in the grocery and meal delivery industry is primed for growth.
Whilst interest in healthtech has been growing, attracting $7.7bn from VC investors in the last five years, Covid-19 has propelled healthtech startups to the forefront of the investment landscape. Not only have consumers rapidly shifted to telemedicine, such as online consultations and chatbot support, there is also an industry-wide move to integrate digital healthcare into the public health sector. In particular, the use of innovative technologies pioneered by healthtechs can offer immense value to overburdened medical systems. From AI-operated training tools for frontline clinicians to blockchain-based PPE supply chain monitoring, the avenue for healthtech’s rapid integration into the mainstream is open, and VCs are ready to capitalise.
The avenue for healthtech’s rapid integration into the mainstream is open, and VCs are ready to capitalise.
Technology defining the ‘new normal’
Although Q1’20 was one of the worst quarters since early 2016 for VC-backed Fintech investment, dropping to $6.1bn across 404 deals, Fintechs are well placed to realise benefits in the medium- to long-term. From payments to insurtech, players across every vertical meet the accelerated need for digital solutions. Consumers are looking to pay without contact and bank without branches. Some Fintechs are already reaping these benefits. For example, digital payments company Stripe announced a $600m funding round last month to boost support for businesses as they move to sell online.
In Africa, Fintech has long been the major focus for VC investment, attracting over 50% of the $1.34bn raised by African startups in 2019. Mobile money, amongst other cashless payment and lending solutions, are at the forefront. And while consumers have been gradually migrating to these digital offerings, Covid-19 is predicted to accelerate adoption. In other emerging markets, essential services have had no choice but to undergo rapid digital transformation due to Covid-19.
In India, for example, Edutech has seen a huge investment boom. Since March 2020, 14 education startups have raised funding. 9 of these at the seed capital stage, showing investors are willing to bet on early stage startups despite uncertainty. Similarly, in China, VC investment activity in March was up sixfold to $2.5bn. Investors sought opportunities in biotech and edutech, with online education startup Yuanfudao obtaining $1bn in a funding round led by Chinese tech giant, Tencent.
Philanthropic investments have also been on the up, as investors look to support companies solving critical Covid challenges. In the UK, the Coalition for Epidemic Preparedness Innovations invested $23.7bn in companies working to develop a vaccine. This clearly indicates the investor appetite for businesses adapting to prioritise pressing needs. Examples of entrepreneurship and business agility have flourished across all sectors. From power-bank startup ChargedUp shifting production to create hand sanitiser stations, to self-drive car rental startup Zoomcar moving to B2B use cases; startups globally have pivoted, diversified or wholly redefined their offerings to meet demands. Creativity, adaptability and resilience have long been central tenants of any successful startup. Now, Covid-19 is bringing these traits into the limelight for all to see, including potential investors.
There is no doubt that the effects of Covid-19 on the VC landscape are far-reaching and impactful. The sharp contraction in economic activity will likely come with an increase in the number of businesses that fail. But, this period of extreme disruption also comes with great opportunity. And we’re beginning to see glimmers of this in the entrepreneurial ecosystem. Startups want preeminent VC backing. But they’ll need resilient business models, and a customer-centric focus in this “new normal”, to emerge stronger than before.
VCs that are able to think beyond current business cycles and anticipate the longer term impacts will stand out. After all, capitalising current opportunities is one thing, outthinking the market to predict the next set is another.
So, while the cloud may seem dark, there are some silver linings. We’re in the unique position now to build the future better than it was ever going to be before.