Covid-19 has not decreased the appetite of Venture Capitalists

This article was first brought in Altinget Digital on August 19th, 2020.

When the initial projections of the economic consequences of COVID-19 began to rise, the fear of a collapse in the Silicon Valley venture capital ecosystem was significant. Typically, when the economic winds turn and a global financial crisis arises, some would intuitively think that the riskiest investment categories automatically will face the first and greatest decrease in investments.

In this circumstance, major economic challenges for the Silicon Valley ecosystem (as well as elsewhere in the world) would be the reality. In particular, for the many startups whose development, survival and growth depends on investors' appetite to invest in their businesses.

However, recent data indicates that investors are not as easily intimidated as some might have feared.

Venture capital investments in the US continue relentlessly, and despite the global pandemic, Q2 2020, with $26.9 billion invested demonstrates that performance is roughly at the same level of investments as Q1 with $27 billion invested. In the first half of 2020, $53.9 billion has accordingly been invested in startups in the US spread across 2,710 transactions. In other words: despite Covid19, more than DKK 350 billion was invested in startups so far this year.

These events follow recent years trend, where venture investments have been historically high, with respectively $48.9 billion invested in the first half of 2018 and $58 billion invested in the first half of 2019.

Moreover, data shows that 79 percent of the investments in US startups in Q2, has been raised in respectively California, New York, and Massachusetts.

Mega-rounds and mergers

Q2 has brought a historically high number of the so-called "mega-rounds," a term used to describe investments of 100 million USD or more. So far, 69 companies have been through a mega-round in the first half of 2020. Of those, the online payment processing company Stripe is the frontrunner bringing in an investment of $600 million.

Looking at corporate transactions, the picture looks a little different. Many companies have (temporarily) suspended their M&A activities (merger & acquisition), resulting in an overall decrease in the total number of mergers and acquisitions.

But just like venture investors, those who traditionally engage in M&A have increased the volume of transactions in 2020. FAMGA (Facebook, Apple, Microsoft, Google, and Amazon) for example, have completed more transactions this year to date 2020 than they did in all of 2019. This might indicate that those who have the funds to invest also receive some favorable deals now with less competition and with companies whose acquisition potential is (financially) challenged by the pandemic.

The winners have supported the "work from home"-reality

VCs are always looking for new opportunities in all markets and the crisis has not changed that; there is always great potential somewhere to be invested in.

A global crisis does not necessarily make that investment worse. Quite the contrary, it is during immense transformations that great potentials are realized, and new realities are created.

The pandemic has amplified the potential of many of the technologies that venture capitalists traditionally invest in. Take, for example, life science companies such as Tempus, which use artificial intelligence to collect and analyze data that can contribute to accelerated development in the treatment of Covid-19.

Another example is the startup company Instacart, a supplier of groceries in the US and Canada, that due to a massively increased demand managed to hire more than 300,000 employees in eight weeks. Instacart has an impressive $13.8 billion price tag at the moment. Yet another company, the video conferencing company Zoom, has in just a few months doubled its market value to $48.78 billion and is now worth more than the entire US aviation industry. On the other side, the online rental marketplace Airbnb has been severely affected by the crisis and has so far had to lay off more than 25 percent of its employees. The market value of Airbnb has in a very short time decreased to half. Roughly speaking, the winners of the crisis have so far been tech companies that have supported the new “work from home-reality” that became dominant in most of the world within a short period of time.

Investors look ahead - not back

VC investors look long-term when investing. They can accept some bad years with massive deficits, as long as the potential over a ten-year period is big enough. Most often, the motive for investing is to take advantage of the new opportunities that arise in a changing world – and less, to focus on the negative consequences of an accruing crisis.

Silicon Valley Bank, the largest startup-focused bank in the world, states that venture capitalists favor startups that were founded during crises. Case in point, companies like WhatsApp, Slack, and previously mentioned Stripe were all founded during the financial crisis back in 2008-2009. Investors are looking for the strongest and most robust startup founders, and the courage to pursue a business idea despite challenging times is an indicator of future success.

In Denmark, the development in the venture investment landscape has also been positive in recent years, and the amount of active international venture funds in the market have increased. However, the need for more venture capital in Denmark is still fundamental, if we want to build the global companies of the future and maintain our competitive position in the international arena. As a startup ecosystem, Denmark can be inspired by strong and more experienced ecosystems such as Silicon Valley, where the willingness and capital to invest in startups with good ideas and growth potential is substantial.