In the first of our “Tips from Silicon Valley” series, Brian Bordley, Principal at the Berkeley SkyDeck Fund discusses the impact of the COVID19 pandemic on startups, while sharing advice for entrepreneurs to weather the storm.
By Brian Bordley*
Over the past several weeks, I have been staying close in touch with the hundreds of founders in Berkeley SkyDeck Fund’s portfolio, as well as the seed and series A investors who have backed our startups. Like most conversations around the world, everything starts with coronavirus.
Unfortunately I am not a public health expert or fortune teller. I can’t tell you how long we will be stuck in our homes, but I can share what I have been hearing from founders and investors in Silicon Valley, which will shed some light on the situation and let you know you are not alone in these times.
Concerning Founders:
Despite the recent negative shocks to the global financial system, many of our founders were continuing due diligence conversations with their next round of investors. VC funds have most likely already called the capital from their limited partners and they need to find startups to invest in. They are likely to continue conversations with founders they were excited about and met in person.
“VC funds are likely to continue conversations with founders they were excited about and met in person.”
That being said, we are likely to see funding slow down in the next 2-4 months as VCs deploy their current capital reserves and hold off on calling new capital until the financial climate is more predictable. It will also likely be difficult for early stage startups to close funding from new investors they are meeting virtually due to quarantine restrictions. VCs generally like to meet their investments in person before pulling the trigger on a term sheet.
In a similar vein, many angel investors have gone silent over the past few weeks. Investing is a side activity for angels, so they are likely focusing on new challenges emerging in their professional and personal lives from COVID-19 and the subsequent economic shocks. It will likely be difficult to close angel money in the coming months. Just like with VCs, it will be hard to meet angel investors face to face with potential investments as they wait for more economic certainty.
“Founders who are fundraising are seeing valuations drop. As teams are in more need of a shrinking pool of capital, it follows that valuations will drop for now.”
Founders who are fundraising are seeing valuations drop. As teams are in more need of a shrinking pool of capital, it follows that valuations will drop for now.
Concerning Venture Capital:
While venture capitalists watch their 401Ks rise and fall with the tides of public health forecasts, quarantine procedures have given VCs something they were desperately lacking: time! VCs tend to have packed schedules filled with coffees with founders and after-work networking events. It is often difficult for them to find time to meet with all of their founders. Now that their commute, and transport between meetings, and nightly events are gone, venture capitalists are less busy than ever.
“It is the easiest time ever to get a call with a VC. Now is the time to send that LinkedIn message or cold email.”
In fact, it is the easiest time ever to get a call with a VC. Now is the time to send that LinkedIn message or cold email. Now is the time to ask your network for warm introductions to VCs. It won’t be easy to move too far in the diligence process or close money right now, but it is a great time to create the connections you need to close a round when there is more economic certainty.
It is also important to remember that much like startups, venture capitalists must also raise money from investors. I have heard of funds who were mere weeks away from closing their next fund, but have had limited partners pull out due to uncertainty.
Many limited partners have a larger portfolio strategy consisting of real estate, bonds, public equities, hedge funds, and private equity. In most cases, venture capital makes up only 1-3% of their strategy. Public equities tend to be a significant portion of an institutional investor’s portfolio. When prices collapse in that segment, the whole portfolio value goes down, which lessens by proportion the amount of capital available to VC funds.
“Most venture funds start raising capital 12-18 months before they need to deploy the capital, so we are unlikely to see this affect the market for some time.”
Like startups raising from VCs, it is difficult for VCs to raise money from limited partners without meeting in person, causing funds to postpone their fundraising altogether. Most venture funds start raising capital 12-18 months before they need to deploy the capital, so we are unlikely to see this affect the market for some time.
What does all this mean?
Nobody really seems to know for sure. I do see a kind of cautious optimism in the VCs and founders, but we look for the brightside in everything. If you are a startup founder with 6-12 months of funding left, figuring out ways to lower your burn rate and reduce churn of current customers will be essential. Startups have survived countless economic cycles in the past, and they will continue to use their competitive advantages (small teams, low overhead, high margins) to make it through COVID-19.
“If you are a startup founder with 6-12 months of funding left, figuring out ways to lower your burn rate and reduce churn of current customers will be essential.”
I would also recommend reading Sequoia Capital’s perspective on coronavirus. Sequoia Capital is an investor in Berkeley SkyDeck Fund and one of the world’s leading venture capital funds.
Learn more: https://skydeck.berkeley.edu/gfp/
Main photo credit: Carlos Musa, Unsplash.
