Asian capital markets have started picking up again as does business and life. Europe seems to be stable after a landslide and we assume that the US markets will suffer some more as panic is growing there. While tech stocks have suffered over-proportionally during the last financial crisis, the big tech companies are hit disproportionately compared to the Dow Jones Index this time.
The capital markets and Venture Capital are connected to one another — directly but with a time lag. The connection is most relevant when venture capitalists sell shares of startups they funded years before. Both channels — the trade sale through M&A as well as a listing or IPO — are directly impacted by the capital markets. This means for now that it is not a good time to sell but likely a good time to start investing over the coming years.
What this environment means for your startup investments
What have we learned from previous crises? First and foremost, we have learned that in good times portfolio companies raise as much capital as is possible (and sensible) and that, if possible, companies are sold in times when exit conditions are favourable. For four years now, we have actually been preparing for a downturn. We have therefore sold quite a few investments in recent years and many of our “big” startups have liquidity for at least one year. That is already reassuring.
Likewise, we had already learned collectively in the startup community during the financial crisis of 2008 that it is vital to reduce costs very promptly in response to an external shock to the economy in order to reduce the associated emotional stress within the remaining employee group and focus effectively on stretching liquidity in the most productive way. As in 2008 with its R.I.P Deck, Sequoia was again the first investor writing the in our view best blog post in the venture capital industry already on March 5. btov spoke with the CEOs of our investments and compiled a list of measures for the younger entrepreneurs to use as a starting point for their own analyses and measures. All companies have thought through new scenarios and have adopted their operations according to it already.
On our side, we have divided all btov startups into a matrix in order to gain a portfolio overview of those that are currently affected by the situation due to their industry and business model (e.g. startups from the travel industry), as well as those that can benefit from it (for example signature digitization) or a third group for whom the effects are still unclear today (as they might have complex supply chains which are in changing states of disruption). We have also divided the companies into very young ones, where sales (and gross margins) are less relevant or not relevant at all for budget fulfillment because the primary focus lies on product development, and those that are in the growth phase and depend on contribution margins to finance overhead — here too with a medium stage. Additionally, the capital reserves in the companies were considered, as well as our own capital reserves that can be allocated to those companies through our various vehicles. We also made an assessment of the co-investors involved. We are generally positive with regard to the btov portfolio under the V-shape hypothesis — where the markets are assumed to get going again quite soon and will not be closed down in further waves over the summer and fall due to external effects.
The various investment teams on the btov platform are currently preparing four different initial investments. In none of the cases have the terms been adjusted by us, as our medium and long-term hypotheses have not changed and we want to be loyal partners to our entrepreneurs — especially in difficult times.
What we expect in the coming months
In the coming months, we are expecting further disruption, overwhelmed healthcare systems and probably worst of all a worried population, all sliding us globally into a long recession. Governments might soon have to make very tough decisions — as outlined by the recent Wall Street Journal editorial suggesting governments might come to a point of needing to decide between severely damaging our livelihoods through extended lockdowns or sacrificing the lives of thousands, if not millions, to the virus.
McKinsey disagrees — and is suggesting to “timebox” this event — avoiding permanent damage to our livelihoods — by building strategies to suppress the virus and at the same time shorten the duration of the economic shock, not least by learning from the Asian experiences around contact tracing in particular. “China, Japan, Singapore and South Korea have shown that these measures can stop the virus from spreading and enable economic activity to resume, at least to some extent.”
What we do not know
The biggest unknown for btov is the extent of the lock-down period. Analogous to McKinsey’s analysis of this issue mentioned above, we hope that we are dealing with a V-curve. Looking to China gives us hope, but we are still inevitably flying blind.
It is absolutely touching how humanity collectively has reacted to this crisis (from singing together on balconies, reflecting on what is really important in life, to hotel chains offering free rooms to doctors and support staff etc.), and how creative many have become (Decathlon has found a way to turn diving goggles into masks).