Effect of Covid-19 on 2020 Startup Investments, IPOs

Initial public offerings underperformed in the last half of 2019 and the first quarter of 2020. That set the stage for an undesirable IPO climate. Then came Covid-19.

The start of the pandemic in China in late December resulted in a private investment crisis in that country, as January and February saw a 50-percent drop in venture capital investing in China compared to the rest of the world, according to research firm Startup Genome.

Now the investment freeze is moving across Europe and the USA. Although U.S. VC businesses committed $34.2 billion to startups in the first quarter of 2020, according to PitchBook-NVCA Venture Monitor, approximately $28 billion of new, additional investments may be deferred for the remainder of the year.

. . .January and February saw a 50-percent drop in venture capital investing in China…

Early Stage Startups

500 Startups, an early-stage venture fund, recently surveyed seed and early-stage investors to comprehend the results of Covid-19 on the early-stage investment climate. The huge majority of respondents were venture capital companies and angel investors. Sixty-eight percent stated that the pandemic would negatively affect their investments.

When asked how long they believe Covid-19 will influence early-stage investing, 63 percent said it could last between one and two years. However, positive investor interest is growing in sectors that benefit from Covid-19, including healthcare (47 percent) and remote work solutions (42 percent). Venture capital funding for telemedicine companies surged in the first quarter of 2020 to $788 million. That funding level is more than triple the $220 million telemedicine companies raised in the first quarter of 2019.

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Investors suggest that startups prepare for lean times. They ought to consider reducing cash burn and examine operating costs for possible reductions. Startups should exude expansion into new markets and maintain focus on customer retention. Startups are heeding the advice. According to data from Roger Lee of retirement plan provider Human Interest, a total of 204 startups laid off 16,229 employees between March 11 and April 8. This trend will most likely continue.

. . .204 startups laid off 16,229 employees between March 11 and April 8.

IPOs

Globally, Q1 2020 saw a strong IPO market with an active January and February but a slow March. Paul Go, Ernst & Young Global IPO leader, stated,”. . .the unexpected and novel events surrounding Covid-19 took a toll on the global health of equity markets and, together with other international marketplace factors, have caused market turbulence last detected just during the global financial crisis of 2008. This extreme market volatility makes any ambitions to go public highly uncertain, both in terms of time and analysis.”

IPO research firm Renaissance Capital calls for a narrow IPO window throughout the summer for companies unaffected by the virus. Others will await the collapse when the market may see a recovery.

In the us, Airbnb, which announced last September that it planned to file for an IPO in 2020, has postponed a filing because travel has come to a standstill. Meanwhile, Airbnb has seen its own unicorn valuation fall from $31 billion to about $18 billion, and instead of submitting an IPO, the company received a brand new equity funding round of $1 billion on April 6.

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Food delivery startup DoorDash in late February filed for a discreet IPO with the U.S Securities and Exchange Commission. While food delivery is booming because of Covid-19, a tumultuous stock market makes this a risky move.

Public Companies

The public markets are volatile, with large swings daily.

Dealroom.co, an Amsterdam-based consulting firm for professional investors, published intriguing data about existing companies. Facebook, Apple, and Google suffered declines in market capitalization of, respectively, 33 percent, 29 percent, and 27 percent between January 31 and March 21, 2020.

Those companies, along with Amazon and Microsoft, comprise almost 18 percent of the S&P 500. Overall, the S&P 500 decreased 32 percent in this period.

Unsurprisingly, Uber and Lyft, offering ride services, suffered market cap losses of 42 and 55 percent, respectively. The Chinese ecommerce giant Alibaba — which was expected to thrive because of increased online sales — dropped 15 percent of its market cap due to delivery and production difficulties.

Conversely, Amazon’s stock has soared by nearly 20 percent between January and April. Zoom, the SaaS videoconferencing company, grew its market cap by 77 percent during the same period, although data about”Zoom-bombing” or people crashing other people’s conferences, has tempered that expansion since the beginning of April. Teladoc, a telemedicine service, grew by 37 percent.

Outlook

Investors are understandably risk-averse in an unpredictable environment. VCs were tightening up standards for later-stage funding of startups. Early-stage startups pose a greater risk. Investments will be rare for the upcoming couple of months except for startups offering services or products which meet the special needs created by the outbreak.

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Last month, in “Will ‘Irrational’ Startup Valuations Continue? ,” I addressed underperforming IPOs. New filings will be carefully scrutinized for the upcoming couple of months and will most likely be on hold.

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