Thank you for taking the time to share a couple of great insights and advice in this uncertain time. The first question is probably the most common one: What does VC fundraising look like today?
Andrej: In general when you look at venture data, VC funds today sit on an unprecedented amount of cash that they raised of the past couple of years. The question is what can the Covid crisis change about the way VCs deploy that cash. And there are a couple of things that I think we will see for sure: (i) many funds will be rebalancing how much of that cash gets deployed to existing portfolio vs new investments, (ii) the deployment phase of that cash is going to prolong: it will be significantly harder for a lot of funds to raise their own new fund, especially on pre-crisis timelines. That means they might prolong their investment period, i.e. they will lower the number of startups they invest to per year so that cash allocated to new investments will last longer, buying thus more time for fundraising of the next fund.
What does this mean in terms of new deals?
Andrej: Both of those things mean that despite the fact that VC funds sit on an unprecedented amount of cash, a lot less of it will get deployed to new investments in the short term. This is going to drive the valuations down. It is too early to know by how much. More optimistic scenario is 10-20%, pessimistic 50%. So you will see new deals getting done. We at Credo have approved three already since the outbreak of the Covid crisis in the Czech Republic. But they will be getting done at different prices than they would have in February.
How is Coronavirus affecting the European startup ecosystem?
Andrej: In our region a lot of founders still only start raising money when they are running out of cash (as opposed to raising it when they are doing well to scale faster). And I can tell you plenty of startups are now running low on cash: some have seen their revenues plunge by 80-90%. Some had a term sheet signed, but their investor pulled out and they are left with no investor and a couple months of runway. I have seen both cases happen in the past three weeks. All that means is that at least we in Credo see a lot of startups fundraising, I have probably processed more investment opportunities in March than January and February combined.
Another interesting phenomenon you will see is employee migration: some startups are laying employees off on a large scale, some like our own Cera, is trying to hire 10,000 (!) additional carers to cope with the demand for their services. So depending on how much cash a startup has in the bank and what industry it is in, you see either big layoffs or hiring sprees on the extreme side, but also quite a few startups hunting at least for a few positions that they found hard to fill recently.
Startups might find it difficult to raise capital with recession warnings. What's your opinion or advice to them?
Andrej: Get creative. Think about how to extend your runway. I hope that finally stock options will gain in popularity in Central Europe. We have seen quite a few startups making a temporary salary pay cut, and compensating employees with stock options instead. Manage your balance sheet, cash is king. Don’t assume revenue will translate to cash. If you see your receivables swell, you have to compensate for that in your payables. Talk to your existing investors about extending the runway, this is when you will know if they are truly founder friendly or it was just a marketing slogan.
How can Founders adjust their attitude in this crisis?
Andrej: At the end of the day, crisis is an opportunity. The mission driven founders will rise to the occasion and double down, while the ones looking to make a quick buck will falter. Crises make startups more resilient and focused, and investors know that some of the most iconic companies get started in a crisis. Just look at 2008 or 2009, when Uber and Airbnb was started. As Paul Graham says: ’ Any startup that gets started during the next few months is disproportionately likely to succeed. Success depends most of all on determination, and imagine how determined you have to be to start a startup in the middle of a global pandemic.
Which companies do you think will be most affected and which startups can really benefit from this?
Andrej: Startups with less than 6 months of runway and those in particularly exposed sectors such as travel will be most affected. On the other hand, those that have large cash reserves and those in hot sectors such as remote work, collaboration & communication, online retail, online education or health services see a big spike in their demand.
Will VCs become more selective?
What’s going to change in the VC market after Coronavirus-times?
Andrej: You always have a delay in seeing impact on VC market, due to longer term nature of their funds. But given the explosion of new VC managers of the past five years worldwide, I think you will see a lot of them disappearing over the next couple of years. Those with mediocre performance and short history will have a very hard time raising the next fund.