A VC Quarter Like No Other
April 28, 2020
Q1 of 2020 began as a continuation of a strong 2019. But it became a whole new ballgame toward the end of the quarter when COVID-19 entered our lexicon. Alan Wink, Managing Director for EisnerAmper’s Capital Markets, gives his thoughts on the impact of the coronavirus on the VC world, how investors are changing their approach, and what we can expect in that now often-used phrase, the “new normal.”
DP:Good. So, Alan, I mean we've done these talks and these updates and these quarterly recaps for a few years now, but certainly the world became a different place around March of this year, courtesy of the coronavirus. Have you seen any corresponding impact on the VC world?
AW:I have to tell you, this has been an absolutely incredible stretch of, six to eight weeks, and someone said earlier today and I think it's so correct. We've literally seen 10 years of changes in 10 weeks. And it's just been an unbelievable period of time. And I think everyone, including the Venture Capital community is trying to find their way and get their bearings. It's funny, not that it's a good indicator for the rest of the year, but Q1 of 2020 was a good year for Venture Cap, a good quarter for Venture Capital. It was sort of on a par with, the prior two years where, we've had historic results. And still $34 billion of VC money invested in Q1. You have to remember, COVID-19 really didn't get hold of us until probably, the last couple of weeks of March. So it really didn't have a big impact on the first quarter, but I assume it's going to have dramatic effects for the rest of this year and way beyond as everyone realizes.
DP:Yeah, I would imagine so. So, it seems like in more tumultuous the times, the more investors go back to basics. I mean, I'm hearing that across a lot of different industries. And obviously it doesn't get more disruptive than a global pandemic. So, are we seeing a more conservative approach, at least in the short term for investments, and valuations, back to basics, solid balance sheets, liquidity, accurate valuations, that kind of thing?
AW:Well, I think the first part is going to be, in the Venture Capital space, there's still a tremendous amount of dry powder out there. I've seen estimates, above $150 billion of dry powder waiting to be invested. But I think the interesting thing from a VC standpoint is sort of their capital allocation. How much of that money is going to go towards, keeping their existing portfolio companies alive? How much capital is to be necessary to invest back in those companies versus new transactions? And I think we're also in an interesting age now, especially with, sheltering at home and social distancing. It's going to be interesting to see how VCs are going to do new deals when, they're having virtual meetings, they don't have a chance to really, spend a great deal of time in person with management teams and founders and entrepreneurs.
And you also have to deal with due diligence being done remotely. So, it's going to be interesting to see how VCs do new transactions. But the good news is that there's still a lot of dollars to be invested. I expect we're going to see a flight for quality in that VCs are going to be spending ... being much more cautious in terms of the deals that they do. And I think you're going to see dollars invested, but I think it might be a little slower than we've seen in past years.
DP:So Alan, look, there's nothing good about this pandemic. There are no silver linings. It's nothing but pain for so many people. But will we see any kind of innovation either on the tech side or biotech or pharma that comes out of this, that could do some good for some people down the road?
AW:Dave, I think there'll be amazing innovation that comes out of this. And, necessity is certainly a reason for innovation. It always has been in this country. And I think you're going to see some entrepreneurs develop technology that makes working at home more efficient. Technology for testing for the coronavirus and other viruses that might come into this country in the future. You're going to see pharmaceutical companies looking at remedies and cures for this virus. I think there's going to be some incredible innovation that occurs. And just, maybe to plug for a moment, EisnerAmper is actually hosting a webinar on April 29th. And we're fortunate enough to have four Venture capitalists from around the country on our panel, discussing the topic of how will VCs react to COVID-19. And talking about how they're looking at the investment climate today. And one of the questions that is certainly going to be discussed is, from these four venture capitalists are any companies in their existing portfolios going to be big winners as a result of this pandemic that we're all going through right now? So, there probably are some success stories that we're going to be hearing in the near future.
DP:Okay. One of the, I guess most overused phrases right now is "the new normal". I was talking to someone in the hospitality sector and they were saying, "Well, we can expect the new normal. This could be the death of things like cash. It could be the death of things like the Las Vegas buffet." When we talk about the VC landscape, and whatever the new normal is and whenever we get there, what do you think is going to be the lasting impact from all of this?
AW:One thing I should mention before we talk about the new normal is that, when you go back historically and look at, really difficult economic times. And probably the most recent was the period 2007, 2008, 2009. What was interesting from the VC perspective back then was that larger deals had a difficult time getting funded because valuations were so closely tied to the public markets and they were declining. Seed and earlier stage deals actually grew. And it's interesting that, through the first four months of 2020, the valuations for smaller deals has really increased. Not dramatically, but still on an upward trend. So it's going to be interesting to see what happens with this pandemic and, once again, I'm not sure you can look at the severity of this pandemic in the same light as the earlier economic events.
I think it's much more severe. The new normal is going to be interesting. It's rolling out as we speak. I think you're going to see VCs who are going to change their investment philosophy and their criteria. I think they're going to be looking in new areas. I think the new normal might include many more people, working from home and the technology that's going to facilitate that being done in an easier way. I think there's going to be much harder looks in the life sciences in terms of solutions to this pandemic and cures and for this pandemic and other viruses that might come down the road in the future. The world is going to be different, and it's going to be different in a lot of ways.
DP:Yep. Well, Alan thanks for your insight. And let's hope the better days are ahead.
AW:Thank you very much. One thing I hope all our listeners are at home, safe and sound.
DP:And thank you for listening to EisnerAmpers Podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper Podcast when we get down to business.