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Funding in the time of Corona Virus

On March 11, 2020 I am due to speak at the SaaStr conference to talk about the current funding environment.

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Funding in the time of
Coronavirus
Mark Suster
Managing Partner
Upfront Ventures
@msuster
We all woke up in February 2020 with a shock to the system
and with no idea what it means for our business or funding.
MarketWatch, CNN
Jan 13: First case of
COVID-19 detected
outside ChinaDec 12: Initial
cases occur in
Wuhan, China
Feb 22: Dow
Jones plummetsDow Jones US Total Stock Market Index
The market hates uncertainty and the market hates deflation
(why buy today what will be cheaper to buy tomorrow?).
Deflation
?
Today
Uncertainty1
2
OR
Time
Valuation
A $40M pre-money deal today may fund at $20M pre-money
in 6 months even if financial performance hasn’t changed.
(not saying it will, but it’s possible)
Time
Pre-$
$40M
$20M
10x Multiple
5x Multiple
(Valuation of $4M trailing twelve-month revenue)
“Valuation Compression” or
“Reversion to the Mean”
If markets stabilize relatively quickly, capital markets tend to
move past an initial sell-off (but this event feels different)
MarketWatch
Summer 2015
“Correction”
Dow Jones US Total Stock Market Index
20202013 2015 2017 2019
Covid 19
Initial Sell Off
Dec 2018
“Correction”
While nobody knows for sure what will happen, I think
coronavirus is more likely to be seen as a “Black Swan” event
(like 9/11) where the world will be very different as a result.
Spanish Flu, Mortality Rates (UK)
First Wave
Second Wave
Third Wave
1919

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Funding in the time of Corona Virus

  • 1. Funding in the time of Coronavirus Mark Suster Managing Partner Upfront Ventures @msuster
  • 2. We all woke up in February 2020 with a shock to the system and with no idea what it means for our business or funding. MarketWatch, CNN Jan 13: First case of COVID-19 detected outside ChinaDec 12: Initial cases occur in Wuhan, China Feb 22: Dow Jones plummetsDow Jones US Total Stock Market Index
  • 3. The market hates uncertainty and the market hates deflation (why buy today what will be cheaper to buy tomorrow?). Deflation ? Today Uncertainty1 2 OR Time Valuation
  • 4. A $40M pre-money deal today may fund at $20M pre-money in 6 months even if financial performance hasn’t changed. (not saying it will, but it’s possible) Time Pre-$ $40M $20M 10x Multiple 5x Multiple (Valuation of $4M trailing twelve-month revenue) “Valuation Compression” or “Reversion to the Mean”
  • 5. If markets stabilize relatively quickly, capital markets tend to move past an initial sell-off (but this event feels different) MarketWatch Summer 2015 “Correction” Dow Jones US Total Stock Market Index 20202013 2015 2017 2019 Covid 19 Initial Sell Off Dec 2018 “Correction”
  • 6. While nobody knows for sure what will happen, I think coronavirus is more likely to be seen as a “Black Swan” event (like 9/11) where the world will be very different as a result. Spanish Flu, Mortality Rates (UK) First Wave Second Wave Third Wave 1919
  • 7. “Social distancing” widely accepted mitigation technique which will dramatically hit certain sectors and impact the most vulnerable people in our society. Chain Restaurants: $151B Domestic Air Travel: $145B Hotels: $205B IBISWorld Example Impacted Markets
  • 8. But there are other factors at work that add to uncertainty that should continue through 2020 and beyond. These are just a few of them. November 2020 Elections BREXIT De-Globalization Worldwide Populism from the Right & Left 1 2 3 4
  • 9. Great business are built in good markets and bad markets. Running out of cash is still the #1 reason companies go bankrupt – so plan accordingly! 1999 - 2002 2007 - 2010 MarketWatch Dow Jones US Total Stock Market Index
  • 10. A look back at the last decade and some thoughts on the next 2 years.
  • 11. After an 11 year bull run it has to be acknowledged that so far this is just a blip. On the other hand, there is a lot further it could fall … Coronavirus stock sell offDow Jones US Total Stock Market Index MarketWatch 20202009 2012 2015 2018
  • 12. Startup funding is up massively in the past 15 years and this innovation will persist … VC funds have raised a lot of capital as value has shifted from publics to privates. They will still need to put $$ to work 2006 2008 2010 2012 2014 2016 2018 $137B $29B 2006 2008 2010 2012 2014 2016 2018 $46B $31B $140B $58B Pitchbook
  • 13. Seed valuations have doubled in this period. 2006 2008 2010 2012 2014 2016 2018 $7M $4.2M 2006 2008 2010 2012 2014 2016 2018 $29M $10M $8M $25M Early stage venture rounds valuations have also gone up considerably. Pitchbook If public market valuations continue to decline it will undoubtedly come to private markets. It takes longer to reset private valuations and those who don’t realize the change may struggle to get funded.
  • 14. There are more billion dollar-valued private companies now than ever, which is a sign of how pervasive the tech sector has become and the value of “privates.” 3 4 4 9 11 12 42 43 22 34 54 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Pitchbook Number of 1B+ Companies Created
  • 15. The public markets FAANG company stock has become a major driver of our overall public returns in the past decade. MarketWatch, pulled March 3, 2020
  • 16. It’s fair to say that the past decade has been amazing for startups and VCs. But …
  • 17. If public markets continue to decline and VC funding is affected, you can expect VCs to first focus on their existing portfolio companies first - “Triage.” Photo credit: Thomas Hawk on VisualHunt / CC BY-NC
  • 18. In a tough environment funding is like constipation, nothing gets through. Pixabay
  • 19. When uncertainty passes VC funds have plenty of dry capital to put to work. In a zero interest rate environments LPs will continue to seek yield. $0 $10 $20 $30 $40 $50 $60 $70 2009 2010 2011 2012 2013 2014 2016 2017 2018 2019 Pitchbook US VC, Total Capital Raised ($B)
  • 20. So your job is to stay funded past this initial phase of portfolio triage and uncertainty. t = ? 3 - 18 months Funding markets Revenue / Cash Balance
  • 21. In a war of attrition, history rewards the early and decisive actions. It sounds easy, of course it isn’t. But everybody says “we’re cutting into muscle” – you seldom are. CASH BURN +
  • 22. There are some reasons the tech industry should maintain its optimism. 100 230 293 1999 2013 2019 250 2800 4574 1999 2013 2019 World Bank, Internet World Stats, Pitchbook, Industry Ventures US Internet Users (Millions) Global Internet Users (Millions)
  • 23. Connection speed in 2019 is a whopping 2000 times faster than that in 1999. 1999 2014 2019 United States (Avg. Speed, Mbps) 50 Kbps 11.1 96.3 Akamai’s State of the Internet, Statista, Ookla
  • 24. Nearly everybody now has a computer in their pocket. 1999 2013 2019 United States Smartphone penetration N/A Global N/A 56% 79% 22% 42% Newzoo, GSMA, Statista, Business Insider
  • 25. We’re all connected – when concepts work, they scale much faster and become much more dominant than at any point in human history. 0 500 1000 1500 2000 2500 1999 2013 2018 Monthly Active Users (Millions) 33 130 218 236 1,189 186 1,000 326 1,057 2,271 Upfront Analysis
  • 26. With everybody’s credit cards or banks now connected to tech platforms, we’ve eliminated most purchase friction. We’re one tap away from buying online. 0 100 200 300 400 500 600 700 800 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Active Users (Millions) * *Amazon user data is estimated as straight line from IPO (1997) to 2018 reported values Source: Upfront Analysis, PayPay, Loup Ventures, BigCommerce
  • 27. Most industry analysts haven’t even begun to comprehend what an enormous shift 5G speeds will bring. We anticipate enormous creative destruction and company creation. < 1 Mbps 4 Mbps 25 Mbps 3G 2G 4G 5G ? Note: Represented AT&T’s average 3G an 4G download speed. 5G networks have the potential to be significantly faster but data is only available from simulated environments. RootMetrics, Wikipedia, Upfront analysis
  • 28. The world is aging rapidly as birth rates decline. We will become more reliant on technology to drive productivity, not less.
  • 29. What we fear – drones, robots, automation, AI: will be strategic imperatives to feed the world.
  • 30. If this is a Black Swan, you must shore up cash now. When chaos is obvious everybody hits the market at the same time. Business Insider / Reuters / Duane Tanouye
  • 31. If it’s not a Black Swan event the worst case scenario is you were overly conservative.