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Early-Stage Investing: After the Storm


At the time of writing, the picture looks grim. With COVID-19 infection rates ticking up by the day, entire societies are going into hibernation. With them, markets have gone haywire–at times seeming irrational. [1]

Investors of every creed would be forgiven for being skittish. The threat posed by the novel coronavirus to the economy and society seems seismic in scale. At SeedInvest, our thoughts are with all those in our 300,000+ strong investor community and beyond who have been affected.

And yet, for companies, individuals and families, this too shall pass. In our conversations with others in the private markets, we’ve found many are already beginning to wonder what kind of lasting changes we will see and what renewed opportunities an undoubtedly new world will bring.

Doom and Gloom in the Public Markets

In the already fast-paced public markets, the rate of activity has been dizzying. With each wave of new cases, with each shock to industry supply and demand, and as news of massive federal and state interventions filled our screens, investor sentiment has driven extraordinary volatility. On March 16, the Cboe Volatility Index reached a new high of 82.69, surpassing the previous peak of November 2008. Gatsby, an options trading startup and SeedInvest portfolio company, was forced to cease trading entirely for a number of days after the national exchanges triggered their circuit breakers.

Meanwhile, in the private markets, more specifically venture capital, the effect has been more muted. As an asset class, venture capital is illiquid in nature. While traditionally viewed as a downside to venture investing, recent debate has centered on how illiquidity can be a positive aspect for investors. In the context of a tumultuous public market in particular, illiquid investments in high-quality long-term assets has the potential to provide relative overall price stability.

Despite this, many early stage companies will take a hit, especially in industries heavily reliant on consumer activity like airlines, restaurants and the fitness and hospitality sectors. Data from Opentable shows restaurant bookings on March 17 were down 100% year on year across several US cities. Already we’ve seen high-profile companies like the Menlo Ventures-backed travel startup, Service, close its doors.

In the short-to-medium term, those companies looking to survive will face stark choices, and may be required to reduce their valuation and fundraise expectations as the venture ecosystem cools, exercising caution and honing in on profitability. Unlike the public markets, we’re also unlikely to see a sharp rebound; as venture funds’ LPs face their own challenges, overall fundraising for private investment funds will likely decline, thereby reducing the capital supply for startups.

The Upside for Early-Stage Investors

This reset is not necessarily a bad thing. In the overheated market of the last several years, hunger for yield has buoyed up valuations for even mediocre companies. As prices come down, a clear benefit for savvy investors is the opportunity to own more for less.

As investors de-risk, lower-quality companies will fade out, while disciplined firms with strong fundamentals, robust business models, and thoughtful and experienced management teams will prevail. In the months that follow, we will see significant opportunity for platforms and investors who can access such qualified, highly-vetted deals.

The upheaval caused by COVID-19 is expected to present opportunity at the seed stage in the medium term. While CB Insights has already pointed to a decline in seed fundraising volume in Q1 ’20 by 22% compared to Q4 ’19, tough periods for the economy can be among the best times for brand new companies to start up. Indeed, some of the largest success stories of the last decade were founded during recessions – 2008/09 saw the creation of Airbnb, Beats, Cloudera, Pinterest, Slack, Square and Uber among others.

Recessionary environments create new problems, and new opportunities for nimble businesses to take market share from incumbents busy licking their wounds. Lean startups are well built to compete without legacy cost centers. Recently laid-off employees flood the talent pool. As we emerge from this period, we can expect a new generation of hardy, disciplined seed-stage businesses to come to market.

Post-crisis we expect new categories to arise or accelerate, with certain sectors benefiting from second order effects. Telehealth, delivery, and remote work startups are obvious near-term candidates, but as the economy rebounds, no doubt we will see societal shifts drive the rise of new applications and even new industries. Risk-tolerant investors will have the opportunity to back founders building a new world.

What Lies Ahead?

While COVID-19 has already wreaked havoc on our lives, economies and societies, no doubt the worst is yet to come. The toll will be heavy, and until we’re able to reassert control, another contagion will continue to spread in the financial markets – fear.

Notwithstanding the anxiety, pain and cost, we must remind ourselves that this too shall pass. Society, our economies, and our families will endure. All the while, opportunities for intelligent, long-term investors with a strong stomach and an appetite for the uncharted will continue to present themselves in new and familiar ways.


[1] These materials may contain forward-looking statements and information relating to, among other things, the company, its business plan and strategy, and its industry. These statements reflect management’s current views with respect to future events-based information currently available and are subject to risks and uncertainties that could cause the company’s actual results to differ materially. Investors are cautioned not to place undue reliance on these forward-looking statements as they are meant for illustrative purposes and they do not represent guarantees of future results, levels of activity, performance, or achievements, all of which cannot be made. Moreover, no person nor any other person or entity assumes responsibility for the accuracy and completeness of forward-looking statements, and is under no duty to update any such statements to conform them to actual results.


This post was written by SeedInvest on March 30, 2020

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