Dispatch From Lisbon: European Investments Amid COVID-19

No one expected that a virus would push the first piece in a domino effect that is leading to a global economic crisis. 

But here we are.

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Investors in Europe are reacting in similar ways to their U.S. counterparts — sailing by sight and timing is everything.

“If we have a prolonged epidemic in the U.S. and in Europe, we might be at the cusp of a recession which might take years to solve,” said Stephan de Morais, partner of Indico Capital Partners venture firm.

Indico has dual headquarters in Lisbon and Madrid. Its portfolio includes companies from Portugal and Spain, the latter severely affected by the epidemic, with over 47,600 cases and 3,434 deaths as of March 25–a mortality rate already above China’s, where the virus originated.

“In this scenario, investors will just focus on their own portfolio,” he added

Only six of Europe’s 66 most valuable tech and internet companies managed to post gains in the wake of the coronavirus crisis, according to a reported titled “Impact of the Corona crisis on startups & tech report” published March 24 by Dealroom. Losses ranged between 5 percent and 67 percent of pre-crash market value.

With still no data on deals for 2020, one can say with certainty that will be far from the record number of €293 billion of investments ($321 billion) made in 2019 in the continent.

Now, according to de Morais, the mantra among investors is, “close rapidly any pending investment rounds and put on hold new investments.”

Defensive posture

The immediate focus for European investors is to defend their portfolio, according to several with whom I spoke.

Managing the existing cash flow of portfolio companies is now paramount — mainly through rationalization of costs and more sales to liquid companies and consumers. To deal with the shortfall, some companies are resorting to human resources strategies such as forced holidays and two- and three-month furloughs to avoid redundancies.

“Some companies are considering taking on venture debt. Not good advice: it’s not for everyone and we have to consider that in this environment fundraising will be very challenging,” said Jonathan Freuchet-Sibilia, a partner at London-based Draper Esprit.

However, many investors are fretting over the perspective of fresh injections of funds to keep things rolling. Some VCs contacted by Crunchbase, while refusing to be quoted, have said investors are retreating their term sheets, effectively pulling the rug from under founders’ and their teams’ feet at a time when fresh capital is more than needed to keep businesses operating normally–and to avoid layoffs.

“Good and honorable investors would continue in the same way as before,” said Christopher Pommerening, co-founder of Barcelona-based firm Active Venture Partners. “Who takes advantage of this kind of situation will be marked and exposed by the startup ecosystem.”

Shifting ecosystem

Meanwhile, besides analyzing cash positions and non-essentials costs, founders have been challenged to find new ways to sell their wares. A wartime mentality has set in as teams try to redirect their businesses toward answering the new necessities born from prolonged lockdowns and state-enforced quarantines worldwide.

Those best positioned to do so are sectors aligned with the needs of the millions under confinement, namely e-commerce, health, communications and home delivery startups. The Dealroom report notes that public companies such as video conferencing company Zoom, digital-only supermarket Ocado and telemedicine startup Teladoc have been outperforming the market, all three posting significant growth of their market capitalization numbers since the beginning of the crisis.

On a smaller scale, pet food home delivery company Barkyn, part of Indico’s portfolio, has seen its business grow since lockdowns were imposed in its three main markets, Italy, Spain and Portugal.

“This crisis might accelerate digital transformation and changes of behavior of more conservative consumers,” added de Morais alluding to the rise of Asian e-commerce giant Alibaba, which had seen its business consolidate during the SARS outbreak in 2003.

Early-stage startup Kaptivo, a Draper Esprit’s bet, developed a cloud-connected camera able to turn a whiteboard into a slide. Initially devised as a B2B product, with the immediate rise of homeschooling its potential as a teaching tool has been a  boon for the company. Kaptivo sold more units in March than in all of 2019. However, Freuchet-Sibilia noted that “not all companies can change their model overnight. It requires planning and obviously funding, and not every company has the ability or will be in the position to do that.”

Pommerening admitted as well that, in the case of not-so-lucky companies: “My recommendation would be pivot fast, extend cash reach to the maximum or restructure to reach cash flow positive.”

Cash-burning companies might be up for very hard times in the near future if the current slowdown drags on.

“Those companies are being told to present plans in which cash burn is lower,” said de Morais. “One of the problems with those companies is that some founders, because of their age, never had to deal with a similar situation. They might find it difficult to overcome all this in a rapid manner.”

Freuchet-Sibilia offered a more optimistic perspective.

He said, “Although the priority is to support our existing portfolio companies, we are not closed for business, far from it. History has taught us that some of the biggest tech companies in the world were often founded in similarly big crises and that innovation is fueled by challenging times.”

Article written for Crunchbase News by Pedro Garcia, a journalist based in Lisbon, Portugal, covering mainly business and economic themes. Follow him on Twitter.

Photo by Giacoma Carra on Unsplash.