There are lots of rumours and whispers doing the rounds right now on the state of the venture market – the vast majority are of the doom laden/end of the world type. Most folks passing on these pearls of wisdom have had a few conversations with the odd investor they know or have heard of companies finding it hard to raise finance. Neither of these little glimmers of knowledge offer any great insight. One thing we can say for certain is that venture investors are not sitting back and watching companies and their founders/directors fail as the image above suggests.
To try to get to the truth, over the last few days, Ascendant has done a “quick and dirty” analysis of the rates of venture investment in Q1 (in the UK and Ireland) to see if the market has really collapsed or faded in any material way. Normally, we are one of the last corporate finance houses to report investment market research each quarter as there is often a significant time lag between deals being done and the date they are disclosed. To allow for this, we take a little extra time and use large number of public data sources and direct information from a very good number of investors to build a more accurate picture of the market (see our regular research posts). So the data below is not our usual deep thorough quarterly review, it is only a quick analysis of data available to us so soon after the end of March to give a “feel” for market trends. We will do a full review in a few weeks.
The headline is so far there has been no material reduction in venture deals being completed. Have a look at the charts (NB the data refers to investments of £500k or more in technology businesses registered in the UK and Ireland):
You will see that there was only a modest drop in completions in March compared to January and February and this number compares well to both the overall trend for the last 15 months and against Q1 investment levels in each of the last 5 years. Clearly the transactions that were completed in February and March of this year would have been working through a 3-4 month pipeline (and some would also have had an end of tax year imperative) and so are not necessarily indicative of actual demand for new deals right now (early April) but nevertheless the data does show that there has not been a widescale panic and, even in a “lockdown”, venture investors are still able to get deals done. Valuations were no doubt a key a topic of discussion on these completed deals against the background of the volatile and downwards drifting public markets – let alone the terrible effects of Coronavirus. Going forward value will continue to be the hardest thing to negotiate with many investors (who have capital for new deals) seeing a chance to get a decent stake in some good companies at “down round” prices. However some companies which are close to cashflow positive or actually generating cash are likely to find themselves with a lot more interested investors and it may be much easier for them to raise venture investment. In the previous market crashes VCs/Growth investors took about 4-6 months to really believe that the market had fundamentally changed and materially modify their investment activity. If they have a 10 year fund and are in the investment period, they still need to deploy capital. If they are not running a structured fund – e.g investing from a balance sheet – the investor can change their priorities much quicker. Some of the latter may pull out of term sheets (which are never binding) and some of the former may be obliged to withdraw if they need to focus on financing existing portfolio companies rather than new deals. We also expect to see a rapid drop off in the number of deals that corporate venturers and non UK based investors participate in – maybe for some considerable time – driven by real world issues like travel restrictions, cashflow problems in a parent entity, etc.
So whilst we are feeling a little reassured that the venture market has not cratered already, it is very difficult to predict how it is going to behave in the next few months. Anecdotally we expect online education, e-commerce and digital health to be investors favourites but companies providing technology or services to travel, leisure and offline retail industries are likely to struggle to find interest. Having been through the 2000 and 2008/9 crises, we are advising our fund raising clients to expect longer processes and fewer investor conversations. However, we will a much better picture of how land lies in about 4-5 weeks with more “hard” data and maybe some good news about the lockdown restrictions being relaxed.
Contact us at Ascendant if you would like to have a conversation about current market conditions and how you should plana and approach fund raising in this environment – we would be delighted to talk with you.