During this challenging time with COVID-19 taking such a toll on financial markets, it is prudent to look at its impact on the angel eco-system. What follows is some brief commentary on the current situation and a review of the thinking which is shared in many countries concerning current investment activity.
The good news is that deals are still happening and many early-stage companies are pivoting to take advantage of opportunities caused by the current pandemic. However for too many start-ups, cash flow issues will force many to reduce cash burn, increase their cash runway and manage resources leanly. For those start-ups operating in industries like the gig economy, hospitality and/or specific consumer industries, cash will become problematic and growth could slow considerably. These companies will have to find a new way to stay afloat with less capital until the consuming public regains vitality.
For investors the angel world is also changing. Pitchbook and others maintain that “follow-on rounds will contribute to most of deal value in the short term”. Many investors’ focus will change from seeking out new investments to supporting their existing investments which appear to be most successful. Follow-on rounds of those companies which have cash and are further along in their development will take precedence over new start-ups. Valuations are going down and exits will continue, as in recent years, to be delayed. Additionally investors will be more selective in choosing which start-ups to support. Early stage companies which look attractive with lower valuations, and later stage companies which are doing well and which have sufficient cash reserves, provide opportunities for investors at this time.
Another variable to watch is the dynamic between investors and companies seeking investment. In recent years, investors were competing for the best deals, even at elevated valuations. Now there appears to be some evidence that as start-ups’ need for investment grows, investors may be able to negotiate for better terms. As the cost of capital increases entrepreneurs will need to be careful about preserving cash and judging when to take on new investment. Investors will focus more on supporting existing investments where profitability and management flexibility have been demonstrated.
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