Investors: Coronavirus could shrink startup valuations

The impact of the novel coronavirus and the economic shockwaves from the stock market downturn and associated travel and work restrictions are yielding unresolved questions for startup founders and investors alike. Long-term bets are facing new scrutiny, and prospects of healthy returns are facing new obstacles. At issue is whether investors have confidence that their portfolio companies can weather the storm. As a result of the uncertainty of the pandemic and its consequences, investors who spoke to FinAi News say a “winners and losers” situation may result as well-established startups with a strong product-market fit have a leg up over newcomers. A slowdown in venture capital flow could also affect valuations and growth opportunities. David Sica, partner at New York and San Francisco-based venture capital firm Nyca Partners , said the impact of travel restrictions on business as usual could affect deal flow. Nyca’s most recent fund, which closed last August, was valued at $210 million. “If you can't go over and meet with prospective clients, or rely on conferences to source leads and opportunities, that’s really going to affect the performance of some of these companies,” Sica said. The in-person meeting often helps investors “pull the trigger” on fintech investments, noted Ruth Foxe Blader, a partner at venture capital firm Anthemis Group . Without that supportive layer, an investment slowdown may be the consequence. In addition, partners, particularly banks with which fintechs do business, may be in business continuity mode, in which digital transformation is placed temporarily on the back burner, Sica said. While startups may have planned for an economic slowdown, venture firms are advising portfolio companies to exercise restraint in financial resource management. Luge Capital , a Canadian venture capital firm with a global portfolio, said it’s advising companies to carefully manage capital resources as a result of the unprecedented circumstances. Startups should be realistic about the results of funding rounds currently in progress, the company said. David Nault, general partner at Luge Capital, said the firm is advising its portfolio companies to carry more cash than usual to anticipate further disruptions, revisit their sales forecasts for 2020 and 2021, and close any funding rounds currently underway. “There will be a real impact on an overvalued company’s ability to raise follow-on funding and as a result valuation will significantly come down,” Nault said. “Businesses that will get funded are those that have demonstrable cost savings or revenue generation models for their customers.” While the impact on startup valuations is unknown, industry watchers acknowledge it could be significant. Ryan Gilbert, partner at Propel Venture Partners, said the impact on startup valuations could follow the broader market. He noted that banks or large financial firms will likely feel pressure on their own valuations and this, in turn, will affect the price they’re able to pay for fintechs. “One-third down [for fintechs] would not be surprising,” Gilbert said. “Post-money valuations for some private companies are way beyond any of the public ones.” Despite these challenges, he said, startups focused on helping small businesses function more efficiently through modern, digital infrastructure are likely to maintain a consistent client base throughout the crisis. See also: As markets plunge, robo-advisers urge caution Startups, however, say preparations for a recession were already factored into their plans. While the impact of the coronavirus on the markets and investment climates is unprecedented, large, established firms are better positioned to chart a path forward, startups that spoke to FinAi News argued. Anu Shultes, CEO of LendUp , which has raised more than $300 million in funding to date, said the company anticipated a slowdown in 2020 and made corresponding changes to cash flow and resource management. She said she has received an inquiry from an investor on the company’s plans, but noted that LendUp’s continuity planning accounts for this impact. “We already took a very measured and prudent approach to cash and expenditures — obviously nobody projected a pandemic could be the trigger [to continued contingency planning].” Shultes acknowledged, however, that late-stage companies may have an edge over newcomers in managing the current shocks. Meanwhile, Rho , an early-stage business banking startup, said the impact of the pandemic is still unknown. It said clients are increasingly relying on its digital-only banking services in light of the current situation, and that the company is taking steps to manage a tighter budget. “We're in an environment where people are more cautious about spending,” said CEO Everett Cook. “[We] don’t know what the next six months looks like.” Startups that may be somewhat insulated from investor and client caution are business-to-business companies that help small legacy financial institutions cut costs by digitizing core banking infrastructure. Sultan Meghji, CEO of core banking startup Neocova , whose investors include community banks, said he’s recently seen an uptick in demand from clients because the Neocova solution helps challenged community banks function more efficiently and cheaply with its modern infrastructure solution. “The amount of scrutiny we get from investors is high and will continue to be, as it should be, but if anything we are seeing upward pressure on valuation in our world," he said. "These players realize that companies that are growing and prepared to handle dynamic situations in the market are the ones they want to invest in." A lot of recession-oriented pressure is on consumer-driven enterprises and companies that provide back-office infrastructure and tech solutions are uniquely positioned in that context, Meghji suggested. Since the time frame and impact of the current crisis is yet to be known, Sica emphasized that investors are taking longer-term bets, and the winners are likely to be prepared to deal with the shocks in a prudent, measured way. The priority right now is to communicate with portfolio companies and get a line of sight on their pressure points. “From the venture side, the first course of action is sort of taking stock of your portfolio companies and understanding where they need help, and I think that’s the main focus and period we’re in right now,” Sica said. The Banking Automation Summit, which takes place from June 1-2 in Miami, is a unique opportunity to share insights, trends, strategies and best practices on back-office automation in financial services with the industry’s leading practitioners. Register here .

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