Impact 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 United States. Although U.S. VC firms committed $34.2 billion to startups in the first quarter of 2020, according to PitchBook-NVCA Venture Monitor, roughly $28 billion of new, additional investments could 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 identify the impact of Covid-19 on the early-stage investment climate. The majority of respondents were venture capital firms and angel investors. Sixty-eight percent stated that the pandemic would negatively affect their investments.

When asked how long they believe Covid-19 will impact early-stage investing, 63 percent said it could last between one and two years. However, positive investor interest is rising 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.

Investors suggest that startups prepare for lean times. They should consider reducing cash burn and examine operating costs for possible reductions. Startups should forego 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 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 sluggish 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 global market factors, have caused market turbulence last seen only during the global financial crisis of 2008. This extreme market volatility makes any ambitions to go public highly uncertain, both in terms of timing and valuation.”

IPO research firm Renaissance Capital predicts a narrow IPO window during the summer for companies unaffected by the virus. Others will wait for the fall when the economy may see a recovery.

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

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

Public Companies

The public markets are volatile, with big swings daily.

Dealroom.co, an Amsterdam-based consulting firm for professional investors, published interesting data about existing companies. Facebook, Apple, and Google suffered decreases 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 during that period.

Not surprisingly, Uber and Lyft, which provide ride services, suffered market cap losses of 42 and 55 percent, respectively. Even the Chinese ecommerce giant Alibaba — which was expected to thrive because of increased online sales — lost 15 percent of its market cap due to production and delivery issues.

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 news about “Zoom-bombing” or people crashing other people’s conferences, has tempered that increase 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 already tightening up criteria for later-stage funding of startups. Early-stage startups pose a greater risk. Investments will be rare for the next few months except for startups that provide products or services that fulfill the unique needs created by the outbreak.

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