With many people in the United States, Europe and Asia quarantined, bleak GDP numbers on the horizon and the equities market posting losses unheard of since the Great Depression, many may be wondering about the health of the venture capital market. In these challenging times, with the volatility index at October 2008 levels and the world’s macroeconomic future dizzyingly uncertain, is it a good idea to try to fundraise? Has the market for capital totally seized up, or are new opportunities presenting themselves?
First, the bad news: the raw dollar figures are down. According to data from Crunchbase Pro, a startup-focused data repository, in March entrepreneurs worldwide raised approximately $27.5 billion in capital for 2,696 deals. During the same period last year, they raised a collective $39.2 billion with 3,538 deals. Overall, this comes to a 30% drop in dollars.
Within the U.S., the market was effectively flat: $12.5 billion was raised during March 2020 compared to $11.8 billion from the same time last year. However, the number of deals have been nearly cut in half, from 1,951 to 1,186. Europe has experienced probably the most dramatic decline, with the Covid-19 crisis shaving nearly half the value off the VC market — only $1.6 billion over 360 deals was raised during March 2020 compared to $2.6 billion via 517 deals for the same time last year.
But even though the deal flow is slowing and the dollar numbers are dropping, there are ways to raise funds. Introduced in 2012 with President Obama’s JOBS Act, Regulation Crowdfunding laws allow startups to solicit investments from the general public provided they do it via an approved platform and follow a strict set of rules. While this started in the United States, other countries have since adopted similar legal frameworks.
Brian Belley, founder of equity crowdfunding advisory service CrowdWise, points out that the investment volume within the equity crowdfunding ecosystem has increased during the last month as investors seek diversification from the volatile world of the public equities market.
“Investors are seeking out alternative investment opportunities outside of public equities. This is a new asset class for non-accredited investors that was previously off-limits,” Belley told Forkast.News. “Some retail investors may be seeking investment crowdfunding opportunities because they are more illiquid, and thus aren’t as susceptible to the massive volatility that public equities experience due to emotion and current events.”
Data from Crunchbase Pro shows that for the first three months of 2019, alternative fundraising accounted for 35.6% of dollars raised, while during the first three months of 2020 it jumped to 42.6%.
“Seeing how a massive, sudden pullback in public equity prices can impact a portfolio that isn’t well-diversified could be the wake-up call that investors need to seek better diversification for their portfolios,” Belley said.
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Macroeconomic headwinds
Although the decline in capital being raised in the U.S. is dramatic, but not yet devastating, that doesn’t mean this won’t change. The U.S. currently lags behind Asia roughly 6 to 8 weeks in the coronavirus crisis, so looking at data from the first three months of the year from Asia might give an indication of where the U.S. will be later in the year.
According to Crunchbase, capital raised in Asia dropped from $26.9 billion in the first three months of 2019 to $18.5 billion during the same period of 2020 — a decrease of approximately 32%. The number of deals saw a sharper decline, as it dropped from 3359 to 1,645, just over 50%.
But that’s not to say this first quarter — which saw the brunt of both Covid-19 as well as the lingering economic anxiety of the trade war — will be reflective of the rest of the year.
Lilia Stoyanov, a professor at Zigurat Business School in Barcelona, told Forkast.News that while valuations will take a hit around the world — especially in the U.S. as private equity firms have been aggressively investing in startups — growth is already returning to Asia.
“The Asian VC market is already recovering, and Chinese investors have been active in Hong Kong. Singapore is recovering too,” said Stoyanov, who is also CEO of Transformify, an HR hiring platform. “South Korea had a different approach protecting both its citizens and the economy. Already, there is one Korean fintech unicorn — Toss — and the market is ripe for more.”
The Danger of the Next Round
Stoyanov points to some obvious sectors where success will be a given during this pandemic — food delivery, freelancing platforms like Transformify, and remote work tools likely will have no trouble raising capital. But the danger comes with yet-to-be profitable companies that are trying to raise more money at a later round during this time.
Although fintech has traditionally been the sweetheart of many investors, Stoyanov thinks that payment processors and challenger banks might be facing difficulties now. She points to Square, a payment processor loved by many small businesses and restaurants — a sector that has been particularly hard-hit during this pandemic — as one company that might be in trouble.
“Square and similar POS (Point of Sale) providers are likely to face a significant decrease in the volume and value of processed payments in the next months,” Stoyanov says. “Unfortunately, many of these small brick-and-mortar merchants may not survive the quarantine.”
Challenger banks — like Revolut, Monzo and N26 — may have a tough time with their next funding round, Stoyanov says, because many have yet to become profitable.
BaaS, blockchain and Value creation to drive things forward
Ultimately, accelerated value creation helps drive economies out of recessions.
For the 2008 recession, one of the great instigators of growth — and subsequent investment — was the mobile ecosystem. The iPhone launched in 2007, and the app store almost a year later. From this, hundreds of billions of dollars of value have been created not just from revenue from in-app purchases but also mobile-first companies that are now goliaths like Uber and Airbnb.
Crunchbase’s data doesn’t show that kind of acceleration for blockchain. In fact, Covid-19 appears to have hit it hard. During March of 2019, blockchain companies worldwide collectively raised $281 million. Fast forward to March 2020, and that number has dropped to $103 million.
In the U.S., things are equally dire: blockchain companies raised $121 million in March 2019, and last month, only $64.8 million. While this could be due to many blockchain companies reaching a certain level of maturity and not requiring as much fundraising, it’s more likely that investors are taking a hard pass during this period of uncertainty.
It’s tough to tell what this next disruptor and value creator will be. Some signs point to “banking as a service” (BaaS) being this next-generation disruptor given its low risk factor, massive total available market (TAM) and integration with traditional banks.
“Many BaaS companies are undervalued as it takes much longer to launch the product, and the sales cycle is typically 3 to 6 months on average,” Stoyanov says. “For example, the valuation of Rapyd [a challenger bank] is about $1.2 billion versus the valuation of Revolut, which is $5.5 billion, and many VCs will see the potential.”
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But while there’s a market worth hundreds of billions in play — something that investors will salivate at — is it really as revolutionary as turning anyone with a car and a mobile phone into an instant limo driver, or anyone with a spare bedroom into an innkeeper? Companies like Uber and Airbnb were game changers in the technological determinist sense; they fundamentally altered how we interact with technology, apps and mobile phones while creating a new class of workers that make up the contemporary gig-economy.
This was a seismic disruption, and there’s still nothing like those companies on the table in the world of emerging technology right now. Disrupting the banking sector, though lucrative, won’t create the same nouns or verbs — “I’ll Uber over to your Airbnb” — as what came from 2008.
