Startups will face headwinds in fundraising in the coming months due to the social and economic disruptions caused by coronavirus, but funding is nevertheless expected to continue, if at reduced levels, and there will be opportunities for startups with solutions to the problems caused by the pandemic.
As of March 29, 2020, Coronavirus cases in California topped 5,700, of which 1,800 are in the Bay Area, and a California statewide stay-at-home order has been in place since March 19, 2020. Also, the major stock averages are over 20% below their previous month’s peak, jobless claims soared to 3.3 million, and there are concerns about a recession. How are these social and macroeconomic changes likely to affect startup fundraising in the coming months? No one knows for sure, but here are some observations:
- Some investment activity is likely to slow due to uncertainty of the economic outlook and disruption of workers. While there is no recent precedent for a pandemic as disruptive as Coronavirus globally, in the 2003 SARS outbreak, Asia’s private funding market fell 27% in 2003 compared to 2002, and 29% in 2004 compared to 2003.
- The decline in the stock market could cause a reduction in funds in the portfolio available to private funding. For example, if the funds in a portfolio were allocated 60% to public securities and 40% to private funding, and the value of the public securities declines, less funds would be available to private funding to maintain the portfolio allocation.
- On the other hand, uncertain economic conditions could result in lower valuations for startups and an opportunity for investors to obtain more favorable terms, which mitigates in favor of continued startup fundraising during the pandemic.
- The technology is available for the startup fundraising market to continue to function. Investment funds and startups have the technology to close deals remotely with teleconferencing solutions and shared cloud document solutions, and many law firms are equipped to continue to operate remotely to support the deals.
- Fundraising deals could face headwinds where there are significant due diligence requirements, since fund personnel may be focused on other issues, and the founders may be focused on immediate strategic plans to adapt and survive the pandemic.
- Fundraising deals that are already underway should be able to close. In addition, where companies have relationships with existing investors, either through previous enterprises (serial entrepreneurs) or through previous rounds, fundraising should face less hurdles in the current environment as investors are familiar with the company and/or founders. It will be more difficult to raise funds from new investors in the traditional way; some investors are likely to pause, but others will accept video calls in place of in person meetings.
- Coronavirus presents a tremendous opportunity for companies that have solutions relevant to the pandemic, and funders have, and are likely to continue to, make funds available to them. Expect startups with products related to finding a vaccine, quick testing, telemedicine, digital health, and 3D printing of medical supplies, just to name a few, to have ready access to capital. Never was it truer that startups should develop a product that the market needs to be successful.
If you require any further information about startup fundraising during the coronavirus pandemic, please contact Edward Grenville, Managing Shareholder, Inspire Business Law Group, PC (firstname.lastname@example.org; +415 279 0779; www.inspirelawgroup.com).
This article is provided for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.
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