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The Black Swan Event: Funding in the time of Coronavirus with Mark Suster
1. Funding Amidst Coronavirus: 2 Months
On, What Should You Know?
Mark Suster
Managing Partner
Upfront Ventures
@msuster
2. 1. What the markets tell us about the impact of the Coronavirus
2. What outlook for VC funding?
3. What can you expect for SaaS business in the next year?
4. What businesses will resonate with buyers & investors?
5. Silver linings
3. We all woke up in February 2020 with a shock to the system and
with no idea what it would mean for our businesses or funding.
MarketWatch, CNN
Jan 13: First case of
COVID-19 detected
outside ChinaDec 12: Initial
cases occur in
Wuhan, China
Feb 22: Dow
Jones plummetsDow Jones US Total Stock Market Index
4. On March 27th, the US Gov’t passed The CARES Act (Coronavirus
Aid Relief and Economic Security) now at $3 trillion, which has
created a market bottom – at least for now.
MarketWatch, Wikipedia
Dow Jones US Total Stock Market Index
Mar 27: CARES Act
signed into law
Mar 19-24: Major State
Lockdowns Begin
5. It is worth putting $3 trillion into perspective to give you a sense of
scale.
2008 Bailout
(TARP)
2020 CARES Act
(So far)
$
$700 Billon
$3 Trillion
4.3x
6. It’s also worth noting the bailout so far relative to how much revenue
the US government had in 2019.
2008 Bailout
(TARP)
$
$700 Billon
2020 CARES Act
(So far)
$3 Trillion
2019 US Gov’t
Revenue
$3.5 Trillion
86%
7. And with the Fed injecting money into the economy it is estimated
a further $8 trillion has gone into the Coronavirus stimulus, 15x*
larger than the Great Recession bailout (*so far, just 30 days in)
2008 Bailout
(TARP)
$700 Billon
2020 CARES Act
(So far)
$3 Trillion
2019 US Gov’t
Revenue
$3.5 Trillion
$8 Trillion
2020 Fed Stimulus
(* Morgan Stanley estimate)
8. In the past 4 weeks 22 million Americans filed for unemployment.
9. Putting the last 4 week’s unemployment claims into perspective –
more jobs LOST than total that EXIST in California or Texas. And
2.5x more than lost during whole Great Recession.
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
Unemployment due to Covid-19
(4 weeks)
California Jobs (Employment) Texas Jobs Smallest 20 States (Combined)
Jobs
Total Unemployment Great
Recession
Data: Washington Post (4/10/20)
2.5x
8.7m
22m
10. The global demand for commodities has plummeted with oil prices
down 66%. Many assets will not be spared as supply > demand.
11. 1. What the markets tell us about the impact of the Coronavirus
2. What outlook for VC funding?
3. What can you expect for SaaS business in the next year?
4. What businesses will resonate with buyers & investors?
5. Silver linings
12. Why is financing hard right now? One reason: The market hates
uncertainty and the market hates deflation (why buy today what will
be cheaper to buy tomorrow?).
Deflation
?
Today
Uncertainty1
2
OR
Time
Valuation
13. A $40M pre-money deal today may fund at $20M pre-money in 6
months even if financial performance hasn’t changed. (not saying it
will, but it’s possible)
Time
Pre-$
$40M
$20M
10x Multiple
5x Multiple
(Valuation of $4M trailing twelve-month revenue)
“Valuation Compression” or
“Reversion to the Mean”
14. Nobody knows for sure what will happen with Covid-19, but the CDC
is already warning that winter could be worse than today.
Spanish Flu, Mortality Rates (UK)
First Wave
Second Wave
Third Wave
1919
15. “Social distancing” now a widely accepted mitigation technique has
already dramatically hit certain sectors and impacted the most
vulnerable people in our society.
Chain Restaurants:
$151B
Domestic Air Travel:
$145B
Hotels:
$205B
IBISWorld
Example Impacted Markets
16. But there are other factors at work that add to uncertainty that
should continue through 2020 and beyond. These are just a few of
them.
November 2020
Elections
De-Globalization
Worldwide
Populism from
the Right & Left
1 2 3
17. VCs have begun to focus on their existing portfolio
companies first - “Triage.”
Photo credit: Thomas Hawk on VisualHunt / CC BY-NC
19. When uncertainty passes VC funds have plenty of dry capital to put
to work.
$0
$10
$20
$30
$40
$50
$60
$70
2009 2010 2011 2012 2013 2014 2016 2017 2018 2019
Pitchbook
US VC, Total Capital Raised ($B)
20. So your job is to stay funded past this initial phase of portfolio
triage and uncertainty.
t = ?
3 - 18 months
Funding markets
Revenue
21. I think the VC-backed tech market will likely see its worst moments
starting in Q1 2021 as startup cash balances begin to deplete.
March
2020
Cash
Balances
9-18 months’ cash
Runway
Q1-Q2
2021
• Increased bankruptcies
• Recaps, pay-to-plays
• Asset purchases
22. 1. What the markets tell us about the impact of the Coronavirus
2. What outlook for VC funding?
3. What can you expect for SaaS business in the next year?
4. What businesses will resonate with buyers & investors?
5. Silver linings
23. Expect 2020 SaaS revenues for many earlier-stage companies to
flatten if not decline.
Booming Market Bearish Market
Executives are paid to “innovate”
• Engage with startups
• Launch initiatives
• Be first-to-market
Executives are paid to “consolidate” and “cut”
• Reduce the number of vendors
• Cancel contracts
• Renegotiate prices
24. • Increased churn
• Price reductions
• Harder terms
Many SaaS startups haven’t seen the full effects yet due to annual
contracts but expect:
Have a plan for this.
Intransigence is not a strategy
• Lower prices but longer contracts?
• Lower revenue but cut OPEX costs
aggressively now?
• Set investor expectations early
25. 1. What the markets tell us about the impact of the Coronavirus
2. What outlook for VC funding?
3. What can you expect for SaaS business in the next year?
4. What businesses will resonate with buyers & investors?
5. Silver linings
26. For existing businesses I would see whether your value proposition
can be repositioned slightly
Cost Take Out
Post Covid Use
Cases
Can your product be used to
reduce other software or OPEX
costs?
Can your product improve operations given the
changes in how businesses will operate?
• Monitoring people or assets
• Improving distributed operations
• Ensuring compliance
27. Some sectors are obviously well positioned for the future and will
attract capital and customers.
• Food production & distribution
• Remote training and distance learning
• Distributed collaboration
• Biotech & diagnostics related to fighting related maladies
• Remote medicine
• Applications for sensing the movement of people
28. 1. What the markets tell us about the impact of the Coronavirus
2. What outlook for VC funding?
3. What can you expect for SaaS business in the next year?
4. What businesses will resonate with buyers & investors?
5. Silver linings
29. Great business are built in good markets and bad markets
1999 - 2002 2007 - 2010
MarketWatch
Dow Jones US Total Stock Market Index
30. Startup funding is up massively in the
past 15 years and this innovation will
persist …
VC funds have raised a lot of capital as
value has shifted from publics to
privates. They will still need to put $$ to
work
2006 2008 2010 2012 2014 2016 2018
$137B
$29B
2006 2008 2010 2012 2014 2016 2018
$46B
$31B
$140B
$58B
Pitchbook
31. There are more billion dollar-valued private companies now than ever,
which is a sign of how pervasive the tech sector has become and the
value of “privates.”
3 4 4
9
11 12
42 43
22
34
54
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Pitchbook
Number of 1B+ Companies Created
32. The public markets have become MORE reliant on tech successes
in the past decade.
MarketWatch, pulled March 3, 2020
33. Technology has truly penetrated our global society. This is no “dot
com crash” we saw in 2000.
100
230
293
1999 2013 2019
250
2800
4574
1999 2013 2019
World Bank, Internet World Stats, Pitchbook, Industry Ventures
US Internet Users
(Millions)
Global Internet Users
(Millions)
34. Connection speed in 2019 is a whopping 2000 times faster than
that in 1999.
1999 2014 2019
United States
(Avg. Speed, Mbps)
50
Kbps
11.1
96.3
Akamai’s State of the Internet, Statista, Ookla
35. Nearly everybody now has a computer in their pocket.
1999 2013 2019
United States
Smartphone penetration
N/A
Global N/A
56% 79%
22% 42%
Newzoo, GSMA, Statista, Business Insider
36. We’re all connected – when concepts work, they scale much
faster and become much more dominant than at any point in
human history.
0
500
1000
1500
2000
2500
1999 2013 2018
Monthly Active Users (Millions)
33 130 218 236
1,189
186
1,000
326
1,057
2,271
Upfront Analysis
37. With everybody’s credit cards or banks now connected to tech
platforms, we’ve eliminated most purchase friction. We’re one tap
away from buying online.
0
100
200
300
400
500
600
700
800
Total Active Users (Millions)
*
*Amazon user data is estimated as straight line from IPO (1997) to 2018 reported values
Source: Upfront Analysis, PayPay, Loup Ventures, BigCommerce
38. Most industry analysts haven’t even begun to comprehend what an
enormous shift 5G speeds will bring. We anticipate enormous
creative destruction and company creation.
< 1
Mbps
4
Mbps
25
Mbps
3G
2G
4G
5G
?
Note: Represented AT&T’s average 3G an 4G download speed. 5G networks have the potential to be significantly faster but data is only
available from simulated environments. RootMetrics, Wikipedia, Upfront analysis
39. The world is aging rapidly as birth rates decline. We will become
more reliant on technology to drive productivity, not less.
40. What we fear – drones,
robots, automation, AI: will
be strategic imperatives to
feed the world.
41. We just have to get through a period of
transition (preserve cash!)
&
as startups solve bigger problems in the
world
THANK YOU
Mark Suster
Managing Partner
Upfront Ventures
@msuster