NFX Founder/VC Survey Predicts Drop In Early-Stage VC Investment

NFX, a seed-focused venture firm, surveyed its founder and VC network of 286 founders and 114 VCs, who provided their insights about how startups are responding to the impact of the COVID-19 pandemic.

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Startup reaction to the downturn has been swift, less than two weeks from the first shelter-in-place order in California on March 19. Of those surveyed, 24 percent of pre-Series A companies had already made layoffs. Venture firms generally advise their startups to respond quickly to a crisis, and make the cut once, so the rest of the team can focus on going forward without further impact to team morale.

The three areas startup founders will focus on to reduce spending are: cut office expenditures (52 percent), cut marketing costs (39 percent) and institute a hiring freeze (38 percent), according to respondents.

On the hiring front, 57 percent will institute a hiring freeze and 28 percent will slow down hiring. A much smaller percentage–9 percent of founders–will continue with hiring and 6 percent will hire more aggressively.

Some VCs–39 percent–predicted it would take a longer time frame for the U.S. to recover from the crisis, pushing it out to April ‘21 or April ‘22. A higher percentage of founders, however, predict it will be back to normal within a year.

As you would expect, VCs will spend more time working with portfolio companies and less time on new deals. Sixty percent of VCs are already seeing a lowering in valuation from founders.

We reviewed funding patterns from seed to Series C during the last downturn to understand the impact of the 2008 financial crisis to see what we can learn for today.

Startups are being guided by their investors to plan for a 2-year runway in order to survive this downturn, and based on what we found, getting back to pre-crisis funding levels took two years.

The 2008 downturn

From Crunchbase data we see a funding reset that started in the fourth quarter of 2008. The low point was 2009, down by 36 percent year over year for seed through Series C funding amounts. In 2010 funding grew year over year by 45 percent–it took two years for funding amounts to exceed 2007 and 2008 invested amounts.

Funding counts for Series A-C was cut by 27 percent in 2009. Counts grew in 2010 and recovered in 2011 above 2008 funding counts. (It is interesting to note that seed counts–not shown below–grew through this time frame, as a newer institutional funding stage.)