The dominant theme from the KPMG Q1’20 Venture Pulse survey, is the immediate implications of COVID-19 on the venture capital (VC) environment for both target companies and for investors. As expected, there was a decline in the number of deals closed in March as companies of all types and sizes had to focus on an entirely new set of priorities driven by COVID-19, however VC investment remained steady.
The extent and magnitude of the longer-term ripple effects will remain unknown for some time to come. Nevertheless, I believe there are several questions that are worth considering today.
What will the longer-term impact be on private companies looking for capital?
There remains a significant amount of venture capital to invest. This is balanced with what is likely to be even more caution on the part of investors. Venture capitalists also need to consider the needs of existing portfolio companies who may need additional funding to get them through this current climate and to a favorable exit on the other side. The total amount invested in Q1 2020 was lower than previous quarters, though still fairly robust. This decline may very well continue into the second, or even the third, quarter depending on how quickly government economic relief measures achieve greater economic stability. The recent and abrupt shifts continue to be the dominant narrative in both the public and private markets, due to the impact of market volatility on liquidity. The build-up to the presidential election in the US will only serve to drive more uncertainty into the markets.
Will VC investors evaluate deals differently?
When considering the most visible business vulnerabilities that surfaced as a result of COVID-19, we expect increased scrutiny on the systemic stability and flexibility of target companies’ supply chains, the anticipated product/service demand, their workforce management practices, use of advanced technology applications, and customer retention practices. It is likely that some of the practices driven by necessity by COVID-19 will remain once the pandemic is over and businesses that address those practices may represent new and expanded categories of investment opportunity.
What are the most promising new VC opportunities?
In the UK and the US, I believe that the underlying economic fundamentals, as well as those for the venture capital industry itself, are largely intact. Based on our collective experiences and what COVID-19 has taught us so far, we would expect to see venture capital investors continuing to shift their interest away from direct-to-consumer businesses to business-to-business enterprises that are focused on scaling up their operations and leveraging more extant tools, such as cloud technology and AI.
For example, new business opportunities should emerge for companies that are developing more robust communications software systems to tackle the pain points and hurdles that companies encountered when the majority of their workforce was working remotely. How can collaboration in a virtual environment be improved? Are there niche needs that became apparent during COVID-19 that haven’t been addressed?
I also believe that we can anticipate an increasing number of new opportunities emerging as a direct result of the spread of a worldwide health emergency. Consider the opportunities for biotechnology VCs, for example, as a consequence of the urgent need to expedite the development of anti-viral vaccines and treatments as well as more effective methods for containing future viruses.
There is little question that some shifts in VC investing will occur due to the economic displacement caused by COVID-19. However, the fundamentals remain in place, and entrepreneurs and owners of other private companies are well positioned to identify and create new opportunities and attract venture capital investors. Watch out for our Q1 2020 Venture Pulse report that is set to release on 21 April for deeper venture capital insights on what took place in the first quarter of 2020.
We at KPMG Private Enterprise understand the potential consequences of the current global health situation for private companies. I encourage you to follow our regular series of blog posts to stay informed about how COVID-19 may affect your business strategy and operations, and to reach out to KPMG Private Enterprise advisers in your country or territory for their guidance.
Visit the KPMG website for a business overview and action checklist titled “Understanding the implications of COVID-19 for private companies” (PDF 382 KB), and KPMG in Canada’s guide to robust business continuity planning titled “Leading successfully in turbulent times” (PDF 229 KB).