To economies, public markets, and VC markets around the world, the novel coronavirus COVID-19 was a black swan event. Its rise in Q1’20 was unexpected and sudden – its impact massive and widespread. Every major region of the world is now working to stop its spread and to mitigate the resulting economic fallout.
While the impact on the VC market was somewhat muffled in Q1’20 due to a strong pipeline of deals in most jurisdictions, the outlook for Q2’20 is much less promising.
Despite some global political and economic uncertainty, including the UK’s official exit from the European Union and the ongoing US and China trade war, 2020 started off on a mostly positive note. VC investment in both the Americas and Europe got off to strong starts. In the US, autonomous mobility company Waymo raised $2.25 billion while cleantech infrastructure investor Generate Capital raised $1 billion. In Europe, UK-based Revolut led fundraising with a $500 million round, while Germany’s Lilium raised $240 million.
VC investment in Asia, however, fell significantly – despite $3 billion raises by both Indonesia-based Gojek and China-based Kuaishou – and a $1 billion raise by China-based edtech Yuanfudao on the last day of the quarter. Deals activity dropped very sharply in Asia, driven primarily by a slowdown in deals activity in China – the first country to be affected by COVID-19.
In February, COVID-19 began to make significant waves around the world, shattering expectations and creating turmoil in the public markets. In the wake of being called a pandemic by the World Health Organization in early March, COVID-19, numerous jurisdictions around the world took unprecedented action to slow the spread of the virus. International travel was limited or banned. Schools were closed or moved online. Bricks-and-mortar businesses and corporate offices not considered essential businesses were closed. People were told to stay home.
Businesses around the world are currently working to cope with the ramifications of COVID-19. With the exception of strategic investments – for example, to enhance digital connectivity and coworking – corporate VC investment will likely be minimal in the short-term as companies focus on ensuring the sustainability of their core business.
While traditional VC investment is expected to slow significantly over the next quarter, there are several niche segments of the market that could remain attractive to investors due to their applicability in the current environment. Health and biotech, for example, including companies focused on digital health, pharmaceuticals and life sciences, AI modeling to predict the spread of diseases, medtech and other related areas. Companies focused on productivity solutions, logistics and delivery, edtech, and online entertainment could also see some investment, along with cyber security and data protection companies given the significant increase in online services.
Heading into Q2’20, valuations are expected to fall as companies struggle to attract funding given the significant levels of uncertainty. There could also be an increase in distressed investments in some jurisdictions as companies begin to run out of cash.