And certainly stock and bond markets have leapt to correct their sanguine-to-bullish state in near-record time judging by the falls in stockmarket indices and safer bond yields (as prices rise) particularly yesterday.
The perceived cause in coronavirus to the loss of confidence is put down by VCs such as Sequoia Capital to a black swan event – or as one wag put it someone in Wuhan province in China eating the black swan rather than the bat they had ordered – but it was hard to argue this is an unexpected fall into bear territory (a 20% or more decline) after the longest bull run in stockmarkets over the past dozen years.
The longer-term trend has been even better for the main S&P 500 index with a 10-fold gain over the past 40 or so years. Plentiful liquidity has washed through the markets driving asset valuations up across the board.
Despite its promise to fund long-term innovation and growth, venture capital has usually been a pro-cyclical industry. More deals are done at higher valuations towards the end of the economic cycle than just after a recession ends. Tomasz Tunguz, venture capitalist at Redpoint, in his blog post, What Could the Venture Market Look Like in the Coronavirus Era, said: “If history is a guide, though, we can look to the 2008 financial crisis. In 2008, the venture market saw depressed valuations for 18-24 months, but a similar deal velocity.”
Actual deal volumes, however, have been falling in the past few years even as the markets started to hit their recent record highs, according to Pitchbook, even as aggregate values have been increasing as more money has flowed into each startup on average.
The traditional dynamics have changed as more strategic investors have come into the market, less dependent on denominator effects than the pension funds and life assurers that used to commit most money to VC funds. Top VCs, such as NEA in its $3.6bn close of its 17th fund this week, have scaled up their fund sizes and become more thoughtful in their limited partner mix to include those that can add more value to portfolio companies. Effectively, however, traditional VCs no longer control the majority of capital interested in faster-growing, entrepreneurial private businesses.
So, what do the strategic likely to do? There are likely to be fewer deals as VCs are still swing investors and might retrench from some types of deals (even if Sequoia has a habit of using its doom notes as a buy-side opportunity to put pressure on getting better terms for deals it likes).
Corporations facing a cash crunch in its main business or unable to roll over its debt and service interest, as the Financial Times analysis shows, will struggle to commit further to deals as they go into survival mode. This will exaggerate the aggregate value decline in deals that do get through.
But survival goes not to the fastest or strongest but the most flexible and the smart leaders, such as the Global Corporate Venturing Powerlist currently being researched by my colleague Liwen-Edison Fu ready for the award at the UK’s House of Commons on 4 June at the end of the GCV Symposium and Academy in London that week, will be able to point to some economic and strategic wins, a more evergreen investment model going forward limiting cash calls to the parent and keep an eye on the disruptive innovations that coming out of this crisis will be valuable to business and society.
Or as former UK Prime Minister Winston Churchill once said: “Never let a good crisis go to waste.”
