'A recession is inevitable': European investors and startups brace for cash drought and lower valuations amid coronavirus slowdown
- Venture capitalists have warned a recession brought on by coronavirus could have a serious impact on the UK's startup scene.
- The UK's Office for Budget Responsibility has warned a recession is 'quite possible' in 2020 as COVID-19 pandemic approaches its peak in the coming months.
- Matt Clifford, chief executive of Entrepreneur First, told Business Insider some founders had learned 'very quickly' how brutal business could be.
- One senior investor source said they expected companies' valuations to be downgraded, while a recession was 'inevitable'.
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Venture capitalists have warned an impending recession caused by the coronavirus pandemic will severely dent the growth prospects of startups in Europe.
Experts are rushing to diagnose the global economic risk posed by the outbreak, with many companies already lowering near-term revenue expectations. On Sunday, Goldman Sachs warned a US recession was on the way, with economic growth set to stall in the first quarter before contracting 5% in the second.
In the UK, the Office for Budget Responsibility has warned a recession this year is "quite possible" as the COVID-19 outbreak reaches its peak in the coming months.
Speaking to Business Insider, a number of prominent VCs explained their concerns about the looming crisis, with many echoing the sentiment that the city's startups looked unprepared for a global recession.
Rob Kniaz is a partner at Hoxton Ventures, which has backed European unicorn startups including Babylon Health and Deliveroo. He said: "This will undoubtedly cause a recession - the major question is how quickly can we recover.
"The next few weeks and months will be essential. The shorter the period of shutdown the easier the recovery will be, but no matter how long there will be legions of people without income [...] and that's bad for the economy."
It's been a bull market up to now
"We've had a 12-year bull market now, in which it was quite easy for investors to be founder-friendly, and it looked like there was an abundance of cash to go around," said Matt Clifford, CEO of Entrepreneur First, an organization which puts together pre-investment founder teams.
"But for many, this is the first week in a long time in which people have entered a scarcity mindset," he added. "And some founders are learning very quickly how brutal business can be."
Clifford said some venture capitalists were using the stress of the present moment as cover to take "pretty unusual steps".
"I won't name any names, but I know of at least two cases in the last week in which investors either withdrew funding or quite disingenuously tried to introduce new terms.
"Some start from a position of partnership and will try to build on that... Others will turn adversarial pretty quickly."
Crazy valuations are done
Karen McCormick, chief investment officer of tech investor Beringea, said the economic impact of coronavirus would likely "change the rules of the game" for investors and entrepreneurs alike.
"The days of growth at all costs, sky-high valuations, and endless funding are clearly numbered," she said.
"Overall, we expect it to be a rough period for most sectors and companies simply because of the unknowns and general slowing down as a result. While software companies may not have supply disruption, we expect sales cycles to be longer, and decisions to be deferred."
One leading fintech investor, who spoke to Business Insider on condition of anonymity, said the coming weeks would "be the straw that breaks the camel's back" for some companies.
"I think late-stage and growth financing for bigger startups is definitely going to slow down this year, compared to 2019," the person said. "And I think you could expect to see some valuations get downgraded as part of the overall market slowdown... A recession is inevitable."
No one knows how long this will last
Dawn Capital, the early-stage software investor whose portfolio included payments firm iZettle, struck a more optimistic note. Several European investors told BI that software startups, with their recurring revenue model, would likely survive the crisis.
"It is fairly certain that there will be one or two soft quarters which is not surprising after 10-plus years of a bull market," the firm said. "There will be delays in closing and ensuing lower growth. However, open opportunities are unlikely to disappear completely so we are encouraging everyone to continue working on the pipeline to move these along."
Hussein Kanji, partner at Hoxton Ventures, said it "wasn't clear" how easily London's startup scene would recover from a recession.
"None of us know how serious this will be, how long it will last or how quickly we'll come back from it," he said. Kanji highlighted the dual threats to supply and demand posed by the coronavirus.
"Most of our founders have no experience handling these kinds of shocks."
One thing Kanji is sure about?
"Startups die when they run out of cash."
