While a handful tech companies like Zoom and Shopify are enjoying massive gains from COVID-19, most obviously aren’t. Weaker demand, slower sales cycles and customer insistence on price concessions and payment deferrals have conspired to dim the growth prospects of many tech companies.
Compounding these challenges, many tech companies struggle to raise capital when they need it most. The data so far suggests that investors, particularly those focused on early-stage funding, are taking a more cautious approach to new deals and valuations while they wait to see how individual companies behave and what direction the economy will take. With the outcome of their planned equity financings uncertain, some tech companies are reviewing their financing strategies and exploring other sources of capital to fuel their continued growth.
Predicting growth in a pandemic: hard work that gets harder and harder
For some businesses, the impact of COVID-19 on revenue has been immediate. For others, the effects of slowing economic activity and tighter budgets emerged more gradually with deals in the funnel before the pandemic shutdown in April and May. Either way, in the second half of 2020, technology CFOs face a common challenge: how to accurately forecast sales when there is very little consensus on key issues such as when to business activity will return to pre-COVID levels and what the long-term effects will be. crisis perhaps?
Unfortunately, navigating this uncertainty is an equally daunting challenge for investors. Today, equity investors’ assessment of a company’s growth potential and the value they are willing to pay for that growth is not only influenced by their view of the company itself. Equally important are their assumptions about when the economy will recover and what the new normal might look like. This uncertainty can lead to situations where companies and their potential investors have significantly different views on valuation.
Longer Funding Cycles, More Investor-Friendly Transactions
While the full impact of COVID was felt too late to significantly impact Q1 deal volumes, recently released data from Pitchbook and NVCA suggests that 2020 will see a significant decrease in the number of companies funded, perhaps up to 30% from 2019 among early-stage companies. And, while it often takes several months to see evidence of general investment trends, anecdotal evidence indicates that investors seek to mitigate risk by demanding additional protective provisions.