Previous downturns show that the investments made post downturn and in to the early stage of recovery can benefit from lower prices, less competition and a macroeconomic tailwind. As a result these investments will normally significantly outperform those made at higher prices pre downturn.
Right now, the balance of power is favouring investors and this could be a once in a generation opportunity to invest in innovative SMEs – with lower valuations, greater opportunity for disruption and demand from large customers.
During the last downturn, angel and seed activity increased 34% as interest boomed as investors backed innovation ahead of a period of prolonged growth. Success stories include many highly valued Venture Capital (VC) backed businesses such as WhatsApp, Venmo, Groupon, Uber, Slack and Square. At the same time, more private investors started to invest in early stage VC drawn by the significant tax benefits of investing in EIS Shares.
Change brings opportunity and there are many small companies with the technology to solve the challenges faced by large companies post COVID. As seen in 2001 and also 2008, market disruption often forces large companies to make the necessary changes to stay competitive and keep market share.
This is an opportunity for smaller companies to sign up larger customers than might have been possible pre crisis, transforming their sales pipelines and seeing their own growth forecasts take on a new trajectory.
There has been a significant slowdown in the number of new deals completed over the past three months as VC companies focus on investing in their existing portfolio companies and also come to grips with performing detailed due diligence remotely. This in turn has led to eligible companies lining up for the working capital required to deliver for their new found customers. The most ambitious companies will often be pragmatic and accept a lower valuation as they know the additional capital is essential to turn their new jet-heeled business plans into reality.
Opportunity Knocks
Q1 2020 saw strong fund raising in the VC sector and early indications are that this continued into Q2. VC’s want to put their capital to work. For more information on how institutions invest in venture capital click HERE. There is plenty of dry powder on the sidelines, waiting for the right opportunities. According to data provided by Preqin Limited, VC money waiting to be deployed in 2019 rose for a seventh consecutive year to roughly $276 billion. Another $21 billion was raised in Q1 2020.
Recent research by Bureau Van Dijk, a Moody’s analytics company, shows in the last three months venture capital funds have predominantly been making opportunistic investments in their top existing portfolio companies but are now starting to contact high quality companies and founders to explore new deals.
Tough Times Don’t Last, Tough Companies Do
Post pandemic, investors will be seeking opportunities at lower valuations, with streamlined business models focused on disruption whilst managing cash flow tightly.
VC investing began to pick up again in May. While some sectors have been heavily affected by the pandemic, many start-ups, especially in the software and biotech sectors, have fared relatively well, offering solutions to the healthcare, digital enterprise, and consumer service needs.
The first half of the year has seen a more subdued market for VC liquidity than in 2018 and 2019. Exit count in 2020 is tracking to be the lowest since 2011. Strategic investors, particularly those who have been through down cycles, will be backing companies that are focused on innovating over the long term and expecting high returns by investing at today’s subdued valuations.
As a shareholder in all the companies we raise capital for, CSS Partners remains supportive and eager to find the capital required by smaller companies. We saw our companies through the Global Financial Crisis in 2008 and we are determined to do the same in 2020.
Since 2001, CSS Partners has raised over £175m for ambitious growth companies. Over this time we feel we have developed a good understanding of what investors want.
CSSP backed companies will often offer EIS Shares so investors can use the significant tax breaks of the UK Enterprise Investment Scheme to help mitigate the risk of venture capital and maximise returns.
Investments offered by CSS Partners are not appropriate to all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
Important Note
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.
Pitchbook Data – Venture Monitor Q2 2020 13 July 2020 (with contributions from the National Venture Capital Association and Silicon Valley Bank).
Bureau Van Dijk – Global Mergers and Acquisitions Review H1 2020.
Forbes – What Business in a Post Pandemic Economy Looks Like 19 June 2020
McKInsey & Co – COVID-19: Global Health and Crisis Response 01 June 2020
TechCrunch – Investment Trends that could emerge from the COVID-19 pandemic April 2020.