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08.06.20

Startup investing in a changing landscape

BY , Philip B. Taub

Like almost every sector of the economy, the COVID-19 pandemic has transformed the startup investing landscape. New trends that were not on investors’ radar are now gaining momentum, while many investments that seemed promising just a few months ago are less appealing now.

Different types of investors have entered the arena, while others have stepped back.

In a recent Sustainable Change Alliance webinar, we shared key themes we’re observing and trends to watch in the startup investment space.

  • Industries and services directly impacted by the pandemic have fueled influential trends in the startup investing space. Telemedicine, 5G adoption, distance learning, food delivery services, and remote office tools are surging. These changes are also having an impact on residential and commercial real estate and co-working spaces.
  • Investors’ attitudes and perspectives are changing. Valuations have plummeted in most areas, but sectors such as life sciences, digital health and telemedicine, and food manufacturing/distribution are actually doing well. Public companies have had access to the capital markets—the debt markets and the capital markets have raised a lot of money—and that likely means big public companies will drive forward with M&A activity.
  • For smaller angel investors, distressed deals are becoming more prevalent in light of COVID-19, and could be an attractive opportunity.
  • COVID-19 has created an opportunity to pivot investment expectations and strategy for life sciences companies. Many are looking to create vaccines or therapeutics, manufacture personal protective equipment, or create new and better diagnostic tests. However, part of the opportunity around COVID-19 isn’t necessarily cracking the code on having “the vaccine” or “the drug,” but instead succeeding with proof-of-concept efforts to demonstrate that a company’s platform technology works in this space—for instance, by providing meaningful analytics support for vaccine development—thus creating compelling case studies for investors.
  • As startups think about fundraising, connecting with the right potential investors is key. One of the challenges for startups during COVID-19 is that in-person networking and pitching opportunities are limited. But, it remains critical to have a robust and solid business plan, to build an impressive leadership team, to be realistic about valuation, and to anticipate practical challenges brought on by COVID-19, such as limited access to laboratories while working remotely and managing the unpredictable supply of critical equipment.
  • Understandably, most early-stage companies couldn’t plan for the practical impact of COVID-19 on their operations, and many didn’t have insurance that covered their losses. They need to work on getting their company in order to the best of their ability to be ready for serious investment, and they should prepare to be transparent about these issues in deal negotiations and diligence.
  • The CARES Act had both positive and negative implications for investors. While it provided some short-term benefits to stabilize small businesses, there are a number of questions about the consequences of having received these federal funds, particularly as the rules are still being written.
  • Prior to COVID-19, the majority of the outstanding debt in our country was at the household level. Today, because of all this federal stimulus, the majority of the debt exists at the government level. Looking forward to the second half of 2020, inflation will likely play a key role, and the economic impacts of COVID-19 will take their toll for a long time.
  • We expect to see paradigm-changing new technologies across industry sectors. Distance learning and remote working will be among the drivers of change, creating opportunities for some companies to innovate and thrive.
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Author

Seth D. Levy

Partner

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Author

Philip B. Taub

Partner

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