Pandemic Survey Finds Founders Less Worried

Gené Teare @geneteare

NFX updated its VC and founder survey, which was last conducted early in the pandemic and released on April 2.

The updated survey, conducted at the end of May with early-stage founders (451 respondents) and VCs (141 respondents), shows that founders are a little less worried about the effects of the pandemic compared to how they felt at the end of March.

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Overall, both founders and VCs have extended the time frame for the recovery, with the majority projecting recovery beyond April 2021. In the previous survey, VC drying up and sales were the top concerns for founders. Despite the projection of a longer recovery, the majority of founders (70 percent) reported that they see no change or growth in revenue, which is higher than expected going into the crisis.

On valuations

In the survey results, 60 percent of VCs report that early-stage valuations have dropped by 20 percent to 30 percent, and predict a further decline in valuations to an average of 40 percent in total.

In Crunchbase’s data, we have not seen a decline in round size (which is a proxy for valuation) for the first five months of the year compared to previous years. That information is influenced by the fact that rounds added to Crunchbase in a timely manner tend to be larger. For now, reported rounds are holding up. As more data is added, however, average and median round sizes will come down.

On remote work

Leading tech companies have announced plans to allow team members to shift to remote work permanently, including Facebook, Square, Shopify and Twitter. This will be a major shift for Silicon Valley, doing more than any other trend to move tech away from the valley. Many startups also are changing their attitude about remote work.

VC sentiment from the survey, however, is that remote work teams are less attractive for investment.

This reaction is surprising as many companies report productivity has not been negatively impacted by remote work. Added to that, access to talent will expand, the cost of engineering talent will come down, and the major cost of office space will be reduced, which will allow startups to stretch investment dollars further.

VC concern might have to do with acquisitions being less attractive if the acquirer values a team in one place. There are also concerns around the network effects of in-person relationships and spontaneous conversation, which can increase innovation.

According to James Currier, founder of NFX, “The more distributed a team is, and for longer periods of time, the more a startup needs to reimagine the social and serendipitous attributes of work that office settings traditionally provided.”

On revenue

A high percentage of founders have not experienced a material impact to revenue growth.

For 23.5 percent of responding founders, revenue has increased.
Around 46 percent of founders see no change in revenue.
For 30 percent of founders, revenue has decreased.

Travel, energy, recruiting, construction and ad tech startups–in that order–are the most impacted, according to the survey.

On hiring

Despite revenue not being materially impacted for 70 percent of startups, hiring is nonetheless slowing down for many of them. A hiring freeze has been instituted at 40 percent of startups, and 32 percent are hiring more slowly.

Only 10 percent of startups are hiring aggressively. For those that are hiring, 50 percent of founders report that salaries have come down.

On funding

VC drying up was the top concern for founders from the earlier survey, ahead of sales and layoffs.

There’s good news, however, we are not yet experiencing a significant contraction in venture funding.

Funding in the U.S. is down slightly, by 14 percent for January-May 2020, compared to the same time period for 2019.
2020 funding dollars already exceed 2018’s amount by $700 million for the same time frame. It’s worth noting that due to data lags, 2020 funding will increase relative to prior years.