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Should I Invest In A Start-up During The Covid-19 Pandemic?

Posted 1 years ago

Should I Invest In A Start-up During The Covid-19 Pandemic?
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When the spread of coronavirus was declared a pandemic by the World Health Organization (WHO), there was naturally a slowdown in funding news. Overall, funding rounds were down 22% in March, according to Dealroom, and valuations have also taken a hit.

Many VCs are looking at a continued slowing down of activity. Whilst many are still on the lookout for interesting start-ups, they’re reducing the number of new investments, and intend to maintain this ‘new normal’ for the coming months. 

UK start-ups have attracted more than half a billion pounds’ worth of investment in the month since the coronavirus lockdown began, according to new industry research. This has largely been led by the technology sector, with Fintech, artificial intelligence, digital security and blockchain start-ups receiving the highest levels of investment.

In this guide, we explain the virtues of investing in a start-up during the pandemic.

Key things to consider before investing

  1. It’s important not to lose perspective. Investors are still investing. However, they will understandably take longer than usual, with many diverting their time and resources to other portfolio companies.
  2. Valuations are likely to be lower, reflecting the new market conditions — but this might put a start-up in a better position for its next funding round as a result.
  3. No sectors are ‘off-limits’ — investors are still investing for the long-term — but they’ll be paying close attention to what growth looks like and where it comes from over the next few months.
  4. It’s important for start-ups to keep developing, even if they’ve become incredibly lean — and smart pivots now could seriously impress investors further down the line.

So, should I invest in a start-up during the pandemic?

Disruption and opportunity can often be the most comfortable of bedfellows, and although difficult at times, investors will be searching for start-ups who are looking through the negativity to find unique opportunities. It is often in these times that start-ups find traction; businesses are able to craft a solution to the problem we find ourselves in.

According to Wilson Casado, “As an investor, I personally think that this is a great time to fund start-ups. These companies will allow “turning setbacks into springboards for opportunities”, and this is worth investing. The sector will also play a key role in creating new jobs, which will be critical in the recovery phase.”

Yet according to another angel investor Rod Leder, “given the likelihood that several early stage companies won’t make it through the turmoil, I think it’s more important to focus on the companies you’re already invested in. Your time and money is best spent on determining if you can help them and how so.”

He added: “I see this as being a smarter decision than trying to deploy new capital in an environment that’s changing so much from day to day. It’s harder than ever to gauge the likely success of a new business. There’s really no need to rush into anything right now, momentum is not on your side after all.”

If you are thinking of investing in a start-up, take a long-term view. By virtue of the term early-stage investment, you are investing in the potential of a company over time. While valuations will likely decline and there will certainly be a need for additional capital and support, the economy will rebound eventually. While it’s likely that start-ups will need extra support, it’s also well known that some of the best venture-backed businesses were founded and funded in recessionary times. Look at Facebook, Microsoft, Nutanix and Electronic Arts.



Author: Oliver Murphy & Sacha Bright 

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. We recommend that you seek professional advice on any topic discussed.

 

Tagged: Start-up Investment Covid-19



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