The Impact of COVID-19 on VC Funds

Blog Post

By: Hans Swildens,

INTRODUCTION
To better understand the impact of COVID-19 and its related government mandates on the venture capital industry, we surveyed our universe of venture funds. Nearly all respondents were VC fund CFOs or General Partners.
The goal of this survey was to gauge the venture capital-related economic impact of COVID-19 and its associated government regulations, and how the consequent actions of industry stakeholders are affecting the VC space. The data that we collected suggests that these various elements are driving the following trends in our industry:

Negative valuation impacts
Portfolio company headcount reductions
Moderated investment pace
Extended fundraising timelines for VCs

TODAY’S ENVIRONMENT: VCs OVERWHELMINGLY AGREE THAT WE’RE ENTERING A RECESSION
86% of respondents believe that we are entering a recessionary period.

MOST VCs BELIEVE “ABNORMAL” CONDITIONS WILL CONTINUE FOR AT LEAST SIX MONTHS
While 19% of those surveyed expect a recovery within six months, the majority —59%— believe that it will take at least 7 to 12 months to return to a more normalized environment.

VENTURE CAPITALISTS ARE PREDICTING NEGATIVE VALUATION IMPACTS FOR THE DURATION OF 2020
More than half of respondents expect the coronavirus pandemic to have a moderately negative impact on venture valuations, though just over a quarter say it’s too early to tell. Only 6% do not expect to see any impact on portfolio values.

NEARLY ALL VCs SEE PORTFOLIO COMPANY HEADCOUNT REDUCTIONS
Only 8% of those polled do not expect any headcount changes in their portfolio companies. Nearly all venture funds are seeing headcount reductions (92%), with the majority of our respondents signaling 11-30% cuts.

VCs SAY THEIR PORTFOLIO COMPANIES ARE, ON AVERAGE, WELL-FINANCED
The vast majority of survey participants—93%—reported that their portfolio companies have at least 7 months of cash on hand to fund their operations, while just over half expect to have 13-24 months of runway.

IMPACT ON VC INVESTMENT PACE & LIMITED PARTNERSHIP DYNAMICS
Interestingly, venture fund Limited Partners do not appear to be signaling to GPs that they would like to see a slower investment pace during this period of uncertainty and volatility. Only 16% of our survey respondents have received feedback from Limited Partners asking them to slow capital deployment.

Regardless, most venture funds do plan to slow their investment pace, with 30% of managers anticipating a dramatic decrease of more than 25% in the 2nd quarter and 27% slowing deployment moderately (between 0-25%).

Despite the current uncertainty, most funds do not yet anticipate COVID-19-related secondary transfers. However, 24% of survey respondents do expect to see Limited Partnership interests change hands in their funds.

JUST OVER HALF OF VCs SEE FUNDRAISING TAKING LONGER THAN PREVIOUSLY ANTICIPATED
Most respondents expect their next fundraise to be delayed or prolonged, but a notable 39% believe fundraising will remain on schedule over the next 18 months or so.

SAMPLE SIZE AND METHODOLOGY: The Industry Ventures COVID-19 survey was designed to collect VC industry views on the coronavirus pandemic and its effects. The sample size was 117 VC firms.

Disclosures

The views set forth herein are solely those of the authors and do not necessarily reflect the views of Industry Ventures. The information and views expressed are generic in nature and are not an offer to sell or the solicitation of an offer to purchase interests in any investments or services. Certain information contained in this article may constitute “forward-looking statements.” Any projections or other estimates contained herein, including estimates of returns or performance, are “forward looking statements” and are based upon certain assumptions that may change. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. There can be no assurance that the forward-looking statements made herein will prove to be accurate, and issuance of such forward-looking statements should not be regarded as a representation by Industry Ventures, or any other person, that the objective and plans of Industry Ventures will be achieved. All forward-looking statements made herein are based on information presently available to the management of Industry Ventures and Industry Ventures does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of Industry Ventures.

This material does not constitute financial, investment, tax or legal advice (or an offer of such advisory services) and should not be viewed as advice or recommendations (or an offer of advisory services).

Of the companies or firms referenced within this material, some are portfolio companies of Industry Ventures or manage funds in which Industry Ventures invests in. The investments shown herein are for illustrative purposes only and are not a full and complete listing. A full listing is available upon request.

Certain information contained in this article (including certain forward-looking statements and information) has been obtained from published sources and/or prepared by other parties, which in certain cases has not been updated through the date hereof. While such sources are believed to be reliable, neither Industry Ventures and any general partner affiliated with Industry Ventures or any of its respective directors, officers, employees, partners, members, shareholders, or their affiliates, or any other person, assumes any responsibility for the accuracy or completeness of such information.