Venture capital firms always had their eyes locked on the next big thing. But the view has become murky, as overwhelmed VCs scramble to triage existing portfolio companies.
Soaring jobless numbers speak to a broader tectonic shift, as forced closures, supply chain turmoil and sudden postponements or redirections of once-promising investments continue wreaking havoc on the business landscape.
When April’s figures come out in May, the damage is expected to be much worse, as unemployment claims skyrocketed with nearly 10 million first-time filers over the last two weeks.
These signs point to an existential turbulence that’s wracking companies large and small. For start-ups with shorter runways, the urgency is critical.
“Everyone’s looking at their cost structures,” Sonya Brown, general partner at Norwest Venture Partners, told WWD. “[Some] won’t have to take dilution or doing down rounds. Others will.” The difference hinges on whether the business is cash-flow positive or if it has access to more funding or ability to raise additional capital.
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In a letter to founders last month, Sequoia Capital called the coronavirus pandemic a “black swan” event, warned start-ups to evaluate if they have enough cash and urged them to prepare for supply chain upheaval.
Hoping to ease some of the pressure, lawmakers are in talks to waive a Small Business Association rule that could make VC-backed start-ups ineligible for the Paycheck Protection Program, a job-sparing effort under the federal government’s $2 trillion COVID-19 stimulus plan. According to the rule, start-ups backed by venture capitalists or equity investors have to count those companies’ employees as their own, which may send some over the 500-employee limit.
The extreme swings as developments unfold create a dire vortex of uncertainty that makes it hard, if not impossible, to look beyond the next few months — or, in some cases, even the next few weeks.
Behind closed doors, VCs tell WWD that the volatility has pushed them into roles as business crisis consultants, emergency fund-raising advisers and even emotional trauma counselors. The shock rippling through their portfolio companies extend across innumerable sectors, making it challenging to predict what things might look like post-COVID-19. They’re too busy trying to help founders stem the bleed.
Not that there aren’t at least a few signs of what may lie ahead.
In Pitchbook’s latest analyst note, the firm stated that “we expect a decline in total venture transaction volume over the next few quarters.” The note suggests that the days of astronomic valuations are over, with downward shifts expected.
Even areas that one might expect to perform well during the pandemic — for instance, technology or biotech, as everyone works from home and health agencies demand more diagnostic and testing solutions — offer no guarantees.
Last month, stocks for companies like Okta, Upwork and Zoom jumped as demand for work- or study-from-home tools surged. Zoom alone saw daily usage of its video conferencing service jump from 10 million in December to 200 million in March.
But with heightened usage comes heightened scrutiny, magnifying the system’s flaws. Just recently, Zoom has been beset by an influx of “Zoombombing,” in which hackers not only access video calls, but post offensive language and images. Now the FBI has issued a warning about using the tool.
Meanwhile, for many start-ups across sectors, the cost of capital has multiplied. And upstarts in fashion, technology and other sectors — who may have dreamt about being acquired someday — need to brace for a new reality: A mergers and acquisition retrenchment is looming, according to Pitchbook. The company anticipates that an M&A “slowdown is highly probable as well, given that corporations will be heavily focusing on liquidity and maintaining operations rather than investing externally.”
Not that all VCs are in complete lockdown mode. Some are looking ahead and eyeing a few key areas like robotics, particularly in the logistics and warehouse side.
“For fashion, wholesale’s been really cut short at the moment,” Brown said. “People are doing their best to push to e-commence where they can in the fashion industry. [Some companies] are already doing that.”
Another sign of where things are heading may lie in changing consumer behaviors, some of which won’t go away anytime soon.
“Overall, people are so worried about their personal jobs, security, putting food on the table. They’re thinking, ‘Do I put money in that new dress?’ And by the way, I’m not even going to that wedding anymore,” she said.
People may be sequestered en masse, but that’s driving them to more fully evaluate their options. For instance, with salon services out of the picture, people are looking to at-home facials and boxed hair products. Norwest is seeing this bump play out in its portfolio with companies like Madison Reed, which touts salon-quality hair color at home.
For Brown, it’s a shift or a “trade down,” with some people moving from prestige products to “mass-tige” items. “Past recessions, folks also just look and see what they have in their cabinets. In times like these, people will finish that jar,” she said. “In some ways we might trade up, in some ways we might trade down. But our relationship to brands is going to shift drastically.”
The imperative for companies right now, she added, is to build good will and find new ways to connect with customers — whether through hosting virtual events and offering online styling tips or supplying at-home wellness or beauty tutorials.
Brown believes this exercise will fuel more innovation in short order, and those efforts will wind up driving long-term change. It’s a sort of optimism that stands out amid the flurry of disastrous business headlines and, it turns out, it’s also rather likely. Companies that have cautiously inched forward with digital initiatives may suddenly understand them as crucial now. In the end, that work may wind up feeding a burst of retail acceleration.
“We may skip forward five years in this COVID-19 period,” she said.