The corona Virus Pandemic has not only hit the US health care sector, but the economic sector also seems to have taken a substantial hit in the past couple of weeks. Non-essential businesses have shut down in the worst-hit cities of California and New York.
As a result of this, many businesses are seeing a drop in shares. Just last Wednesday, the S&P 500 closed at 30%, less than their lowest record last year. The forecast isn’t good for the world’s GDP, and economists foresee a reduced GDP for the US.
While this is not good news for the bigger and more established businesses, it is doubly bad for startups. Most startups looking for investors would be unable to get the money they need. Investors aren’t too keen to part with their money when they can’t access the company’s management team effectively.
Online meetings are great, but with situations like this, investors prefer physical meetings. And this isn’t looking good for valuations at all. The newly emerging economic risks make it difficult for startups to get willing investors.
The tech hub of the nation, Silicon Valley, is finding this new development particularly tricky. The lockdown in California and the bay area has crippled in-person valuations of these startups. Coupled with that is the uncertainty of the future. Valuations for startups rely on the future growth of the companies. With the current situation, estimating that would be very difficult.
Ryan Gilbert of Propel Ventures explains the effects of this limbo when he says, “I don’t see too many term sheets being issued in the next two to three weeks until there’s more clarity. It’s certainly drying up. People are worrying more about themselves and their families than they are about pitching VCs.”
2020 seems to be a bad year for tech startup companies generally. Even before the Corona Virus pandemic put a stop to most valuations, investors were already cautious.
With under-performing tech debuts like Uber and Lyft, investors are looking out for other things like “sustainable revenue growth and profitability, while telling portfolio companies to reduce their burn rates,” says Nizar Tarhuni, the director of research at Pitchbook.
Investments at this point would be very few and far between, as investors have been advised to put off raising money in the meantime.
Even if any startup were to get an investor during this pandemic, they wouldn’t be getting as much as they would have a couple of weeks ago. That is because investors are going to consider the new economic risks and what it means for them and the startups in the long run.
It isn’t all bad news for investors and companies alike. Some deals are still going through, even with the new economic risks.
Index Ventures, in particular, is still working with the companies they had started discussions with before the pandemic. More than that, they still access new startups preferring to use Zoom to conduct their regular businesses even if Zoom may not be the best way to assess the management team of these young companies.