Blog 09.04.2020

The Impact of Covid-19 on Private Capital Markets: Advice for Start-ups

Alexander Green
Chief Commercial Officer

The present crisis is without precedent, and the executives and employees of the many start-ups that emerged post the financial crisis will not have had any experience of the type of volatility currently being experienced by investors and companies in the public markets. 

Investment is governed by expectations, but this global event is different to usual economic slowdowns in that very few investors have any idea on how this will eventually play out in the wider economy.

Although it is clear that certain sectors such as entertainment and leisure will be hit the hardest, what the actual impact will be is very hard to determine, given the extensive financial Government support that won’t be known until the second half of the year at least. 

One thing that hasn’t changed is the level of the cash pile that PE and VC funds must invest, estimated at 1.5 trillion dollars by Prequin at the last count. Private investors also have significant pools of cash sitting on the side lines. The world’s top 5 corporations have half a trillion USD in cash between them In addition, the Federal Reserve, other central banks, and governments across the world have just embarked on very significant monetary and fiscal stimulus measures, which will significantly increase cash in the system. 

Investors will be waiting for the right time to move back in and already PE and VC are on the hunt for any good opportunities, given that ahead of virus crisis, investors were concerned that the prices of many assets were just too high.

If you are a start-up currently considering how to ensure that you re-embark on growth beyond the current situation  and are concerned about whether you have the ability to survive, we would advise the following in terms of boosting your appeal to  existing and new investors: 

  • Don’t freeze. Clearly the current lock down has an impact on certain types of activity. But that does not impede progress on other work-flows such as product development, research, strategic planning and content creation and prepare for the recovery, which will come, so that you can hit the ground running.
  • Communication is key. Get in touch with your existing investors and discuss your situation armed with as much information as possible about risks to our business from the current markets and the eventual possible upside.
  • Be prepared to be as flexible as possible. There is Government help out there, but help is not going to be available for everyone. For example, imposing a 10 per cent to 20 per cent cost reduction could get you through this period, will highlight your ability to adapt and will make you attractive to investors.
  • Consider whether there is a cheap and quick way to access new capital through a private placement fundraising.
  • Speak to your counterparts/other companies that are running related or complimentary businesses – everyone is in the same boat and there may be opportunities to collaborate and to navigate the crisis together.  

 
Find out how our digitised cap table packages can help you 

These are trying times for businesses of all shapes and sizes, and with capital markets undergoing a tectonic shift, financing solutions will be in the spotlight. The current climate presents a rigorous test of resilience and the capacity to pivot operationally. Small firms’ top priorities should be minimising overheads and generating a clear plan of action to meet cash flow requirements and contractual obligations. In these and other areas, early stage start-ups and SMEs possess clear tactical and strategic advantages over their longer established peers. The creativity and tenacity which is brought to bear under current conditions will make for incredibly enticing additions to the investment case when capital markets return to growth. Start-ups should balance restraint with preparedness, keep their powder dry but diligently monitor for opportunities – you can rest assured investors are doing the same.

 

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