The Coronavirus pandemic has added to the uncertainty that was hanging over the global

economy and caused significant disruption in several markets. Unemployment rises, cash dries
up, and for many startups, this will mean death. For others, by clamping down on burn rates
quickly, becoming hyper-efficient, and continuing to execute, even at reduced growth rates,
they will make it out on the other side.
The global spread of COVID-19 has upended life for everyone, and while a handful of businesses
are coping with it, the world of private equity, venture capital and startups is experiencing a
more abrupt fashion of downturn.
This briefing note is an outlook of the state of an industry that accounted for 28% of aggregate
growth in 20191, looking into capital deployment, the struggle of raising more funds, the new
focus areas of investments, and what management strategies for the existing portfolio
companies.
Capital deployment – According to the results of a survey held by Kauffman Fellows2, the
networking and leadership development program for venture capitalists, among ninety
seasoned venture capital partners, the majority (75%) expect a slowdown in funding new
ventures. A few (25%) are still trying to make deals over Zoom as the pandemic got tougher,
optimistic that activities will pick back up. Investing in a company usually requires meeting in-
person and getting to know the company and the people behind it. The lack of in-person
interaction during the pandemic has come to monopolize the focus of venture capital firms
back on deals they already had in their portfolio, and done site visits for, met the team and
done due diligence.
Raising more funds – Venture capitalists invest money on behalf of their limited partners, the
money behind the money (pension funds, financial firms, insurance companies, and university
endowments). They have spent over $1.5 trillion in venture capital deals worldwide between
2010 and 2019, with most of these expenditures coming in just the past few years. In 2019
alone, $294.8 billion was invested in nearly 32,800 deals across the venture spectrum, and
more funding was expected for 2020. With the world governments closing borders and issuing
stay-at-home orders to mitigate the spread of the pandemic, the promising fundraising results
in the first quarter3 that set the year on pace to near-record levels is likely to subside. More
than 85% of venture capital firms predict that it will be hard to raise new funds from their
investors and harder to find new partners to invest in new deals.
Avoiding some sectors – At least for the next 12 to 18 months, the majority of venture capital
firms are assessing their portfolio and avoiding industries that rely on discretionary consumer
income, such as luxury, hospitality, and travel. It's also the case for restaurants, brick and
mortar stores, and events companies that require in-person services. As markets shifted for
online platforms, the companies that have offline activities and need extensive investments, if
not prepared to keep afloat for the next 24 months, would likely be in severe difficulties, as the
investors are playing overcautious.
Focusing on portfolio management – Mentoring, restructuring, cash preservation, and costs
structure reviews for portfolio companies are among the increasing day to day tasks of private
equity and venture capital firms. Many venture capital firms are increasing communication and
encourage portfolio networking to establish confidence and provide mental support to their
startup's employees and preserve talent. Some tech companies even offer trade-in salaries for
stock4. Private equity companies and venture capitalists are lobbying, urging the government to
include their portfolio companies in the small businesses bailout loans. Their idea gained
support in Congress, including from Speaker Nancy Pelosi and Representative Kevin McCarthy,
who leads House Republicans. However, they faced criticisms from Senator Elizabeth Warren
and other progressives who say that "private equity firms, which buy, sell and sometimes close
companies in so-called leveraged buyouts, are harmful to workers and the economy." 5 Amanda
Fischer, policy director at the Washington Center for Equitable Growth, said it would be a
mistake to allow private equity-owned companies to tap into the funding. She said it would
crowd out "mom-and-pop" operations that don't have the same access to sophisticated legal
advice and deep relationships with lenders. Some companies, such as Shake Shack, returned
the money they had received from the government's small business aid program, to bring down
criticism.
The choice of Mergers and Acquisitions (M&A) over Initial Public Offering (IPO) – The fear for
startups and their venture capital partners to engage in new fundraising at low market
valuation has led to favor M&A. Shifts in human behavior caused by the COVID-19 pandemic
(increase in telehealth services, distance learning, and video communication), will translate into
attractive deals for private equity firms, thus, more M&A activity in those sectors. The
percentage of transactions involving rescue deals, restructurings, and distressed sellers will
likely increase. However, the uncertainty created by the ongoing pandemic and the new ways
of negotiation6 - 7 excluding in-person interactions could hinder appropriate buyers/sellers'
responses as valuation, due diligence, and purchase agreements, among other considerations
and processes, may present challenges.

References :
1 https://voxeu.org/article/impact-venture-capital-backed-firms-aggregate-economy

2 https://www.kauffmanfellows.org/journal_posts/vcs-on-investing-raising-funds-and-portfolio-

support-in-the-covid-era
3 https://pitchbook.com/news/reports/q1-2020-pitchbook-nvca-venture-monitor?

utm_medium=nl-na&utm_source=reports&utm_campaign=q1-2020-pitchbook-nvca-venture-
monitor
4 https://www.bloomberg.com/news/articles/2020-04-17/tech-startups-ask-workers-to-trade-

in-salary-for-stock
5 https://www.nytimes.com/2020/04/27/technology/startups-sba-loans-backlash.html?

searchResultPosition=2
6 https://www.forbes.com/sites/allbusiness/2020/04/17/impact-of-coronavirus-crisis-on-

mergers-and-acquisitions/#2509f720200a
7 https://corpgov.law.harvard.edu/2020/03/29/ma-in-times-of-covid-19/