How Will VCs React to COVID-19?
May 06, 2020
By Brigette Lumpkins and Alan Wink
The venture capital industry, just like numerous other industries, has been heavily impacted by the COVID-19 pandemic, from investor inflows into the space, whether portfolio companies should apply for Paycheck Protection Program (PPP) loans, whether or not to invest in a founder without meeting them, and more. EisnerAmper recently hosted a live webcast titled “How Will VCs React to COVID-19?” moderated by EisnerAmper’s Alan Wink, managing director of Capital Markets, and John Pennett, partner-in-charge of the Technology and Life Sciences groups, where a handful of VC principals discussed how the industry is responding to the COVID-19 crisis.
Here were a few themes discussed:
In the first quarter of 2020, $34 billion of venture capital was invested in companies. That number is expected to drop precipitously this quarter. $140 billion in VC investment was made in 2019; the panel on average predicted that number would fall to around $100 billion this year.
Regarding Paycheck Protection Program (PPP) loans, most VC firms are advising portfolio companies to be conservative in their interpretation of eligibility and to consider both legal (including the threat of class action lawsuits) and reputational risks to accepting funds. A key issue is the materiality of any COVID-19-related loss to the business as well as the availability of other funding. Some portfolio companies are being encouraged to review their ability to repay in 90 days and to consider not applying for forgiveness.
INVESTING WITHOUT MEETING FOUNDERS
The panel was split on making investments without meeting founders in person. There is recognition that some founders will have an advantage because they connect better via Zoom (the predominant platform being used), highlighting the need for entrepreneurs to work on their videoconference presentation and communication capabilities and skills. One VC principal mentioned that meeting founders remotely enables more frequent meetings, and also forces them to ask questions they may have gotten answers to intuitively before. They are also relying more heavily on data to drive insights about founders they are getting to know.
Some investors observed that the effect of the crisis has been an acceleration of trends favoring online retail and other tech-forward solutions such as drone package delivery.
MENTAL HEALTH IS KEY FOR ENTREPRENEURS
Mental wellness for founders is a key area of focus for some investors as they guide their portfolio companies through this crisis. Some VCs have set up “support groups” for their respective portfolio company founders.
In addition to mastering the new normal of presenting via video, entrepreneurs are advised to consider delaying their capital raise – unless it is extremely timely and cannot wait – until there is a return to “normal.” Across the board, warm introductions and relationships to VC investors were recognized as helpful to founders. Raising capital will obviously be even more difficult in this environment and it is critical to adapt messaging to the new reality.
CAPITAL ALLOCATION TO NEW VERSUS EXISTING PORTFOLIO COMPANIES
VCs are faced with an interesting dilemma: whether they should support existing portfolio companies with additional investment, providing funding for those that are in growth mode currently due to their delivery model or service offering; or provide funding to those companies that are struggling because their business models are not conducive or adapted to the “new normal.” The capital allocation question can further be described as “investment funds still have money to deploy for new investments” and legacy funds have funds reserved already for add-on investments to existing companies.
EisnerAmper would like to thank the following panelists for sharing their insights:
- Sean Dowling, Partner, Osage Venture Partners
- John Frankel, Partner, ff Venture Capital
- Jim Gunton, Managing Partner & Founder, Tech Council Ventures
- Elaine Russell, Principal and Co-Lead, ACI Fund, Greycroft
- Mark Volchek, Founding Partner, Las Olas Venture Capital