How coronavirus is affecting Business Angels and start-up investing
Professional business angels warn that “start-up investment will diminish”, with the exception of opportunities that have “impact on issues caused by the virus”
All European countries are taking strict measures to contain the pandemic and citizen collaboration has become the best weapon to prevent the spread of infections. The coronavirus crisis affects us all, and although it is still early to know the magnitude of the impact it will have on the economy, the predictions are not rosy. Internal documents leaked from the European Commission seem to reveal an expectation that the slump caused by the Covid-19 will be deeper than the 2009 Great Recession[1]. We asked three professional business angels, members of the ESIL community, about how this crisis is affecting their activity and what consequences they expect. They also have some advice both for investors and for start-up founders.
LARISSA BEST, Luxembourg Business Angels Network.
- “The pandemic will bring a lot of unemployment which will push people to look for stable jobs and thus make it harder to start-ups to hire talent”
- “I believe that people are looking for safe havens and start up investments will diminish”
How is coronavirus affecting your angel network? What consequences are you expecting?
As everyone else, we had to move all our events online. We also moved all our conversations on the board level online which is helping us stay informed and share documentation. All our deals are on Gust anyways and thus there is not much change there. Our online gatherings are working quite well but we noticed that you really need a moderator for the sessions to make them work and call everyone out to give their opinions etc. Overall, we are very happy with our move online so far. For the future, we expect that when the social or physical distancing is lifted, our normal face to face schedule will resume as most people prefer this over online meetings.
How do you think it will affect the economy and, more specifically, the early-stage investment sector?
That is a good question. This depends a lot on how long we will have to maintain social distancing which depends on vaccination, medication and accurate broad assessment of Covid-19. If this state of emergency is maintained for another 2-3 months, I believe that we are looking at a huge inflation wave coming our way as countries will print money to offset the huge debt that they incurred, plus some crises taxes which will definitely hit all companies and their ability to generate profits for their shareholders. I also believe that the pandemic will bring a lot of unemployment which will push people to look for stable jobs and thus making it harder to start-ups to hire talent. Furthermore, as the stock market is very volatile, I believe that people are looking for safe havens and start up investments will diminish.
Do you think that a similar flow of investments will be maintained or that business angels will be more conservative?
I believe that business angels will be rebalancing their portfolios with less money going to new start-ups and the money that they allocated for start-ups will be going into their existing portfolio.
Any tips/recommendations for investors or start-up founders riding the wave of the crisis?
I would recommend investors to invest into their existing portfolio for the moment and wait for things to settle. The same goes for start-up founders. If you have not launched yourself yet, wait unless your business model works well in a crisis like this one. There are sectors which are working well.
NELSON GRAY, Linc Scotland
- “Unless an opportunity presents itself that has a direct and significant impact on issues caused by the virus there will be no investing in new companies”
How is coronavirus affecting your angel network? What consequences are you expecting?
Based on conversation with several investors and angel groups, all normal precautions are now being taken – groups being managed from home – not offices, no face to face meetings of groups or management of groups.
The focus is on portfolio companies. All are being helped to come up with survival plans and looking at how to cut costs / preserve cash. This will include staff reductions and suspension of any non-essential activities, research and development, marketing etc.
How do you think it will affect the economy and, more specifically, the early-stage investment sector?
Unless an opportunity presents itself that has a direct and significant impact on issues caused by the virus there will be no investing in new companies. All funding will be reserved for portfolios.
Only the strongest companies in the portfolios will receive more funding. Likely that many who were marginal or zombie, or in need of a pivot, will be allowed to die. Most customers of invested companies are now themselves in survival mode – not looking to take on new product ideas unless there is an immediate cash benefit.
A few may be able to pivot – for example gin manufacturing has turned to making hand sanitiser (gin sales were collapsing as restaurants and bars have been closing).
Do you think that a similar flow of investments will be maintained or that BAs will be more conservative?
The supply of funding will be much reduced. Angel investors will have suffered significant wealth reduction due to falls in stock markets, plus issues with their own businesses – they will be trying to salvage their own situations and not looking to invest in new. They will also be looking to support their wider families as they lose jobs etc.
This will take quite some time to reverse. My prediction is that we will see a dramatic drop in new funding (and indeed follow on funding) for at least two years.
Any tips/recommendations for investors or start-up founders.
Advice for investors – now is the time to focus on the strongest companies, those that will be able to achieve cash flow. Be ruthless in cutting costs now.
Start-up founders – unless you can make a significant contribution to battle the virus, best to put activities on hold and preserve cash. Anticipate that finding new customers for a new product will be on hold for 12 months plus. Take the hard decisions re cost cutting now.
ULTAN FAHERTY, Halo Business Angels Network
- “There is a fear that investment decisions will be put on the long finger till the macro-economic situation settles down”
How is coronavirus affecting your angel network? What consequences are you expecting?
Investor pitch sessions are cancelled obviously but we are trying to run them online.
How do you think it will affect the economy and, more specifically, the early-stage investment sector?
Even though we are running sessions, and while investors may have an interest in projects, there is a fear that investment decisions will be put on the long finger till the macro-economic situation settles down.
Do you think that a similar flow of investments will be maintained or that business angels will be more conservative?
More conservative I feel but it is a little early to say - although this situation will become clearer soon.
Any tips/recommendations for investors or start-up founders?
Now is a good time to assess / look at opportunities and, when the economic situation recovers (which it absolutely will), you will have opportunities to invest in. For entrepreneurs, now is a chance to fully prepare your proposal and perhaps, if you can, engage investors for their advice on how your project could address challenging development issues.
Written by Pablo Munilla for the Early Stage Investing Launchpad
