The U.S. startup ecosystem has rapidly entered a new chapter of what will be a turbulent period over at least the next several quarters. Investment in the startup ecosystem is expected to drop significantly at a time when the country needs it most for company and job creation towards economic recovery from the global pandemic. NVCA released a white paper outlining what we believe the industry may look like over the coming months as this crisis evolves.
What we expect:
- More layoffs – Since March 11, about 300 U.S. startups have laid off more than 30,000 employees. One VC predicts 80% of startups will cut 10-50% of employees over the next two to four quarters.
- $120 billion in US VC dry powder has inherent limitations and won’t meet startup demand – VC investors must factor in reserves for investing in existing companies vs. new companies, account for fund and investment timing over the long-term, prioritize equity investments since they are their core strategy, and adhere to investment strategies outlined in the agreements they have in place with limited partners who have a fiduciary duty to their constituents.
- Pullback from other, nontraditional sources of capital for startups – These have been an increasingly important source of capital for the startup ecosystem, but many nontraditional investors are likely to follow economic trends in recessions of moving capital from high-risk illiquid assets to lower-risk liquid assets.
- New capital for VC investors will slow – Limited partners are rebalancing portfolios and will reduce exposure to VC now that they are over-weighted in private markets after public market turbulence. LPs are taking a cautious approach to new commitments to VC funds. Emerging VC fund managers are likely to feel the capital crunch more than established VC firms.
- Stalled exit activity to delay liquidity in the VC lifecycle, placing additional demand on VC dry powder – IPOs are tied to public markets, which have seen record drops. Strategic acquirers are assessing the impact of COVID-19 and planning their rebound, which will affect M&A activity. VC investors will have to stretch their dry powder further to support companies staying private.
Why it matters:
- New barriers to accessing capital for historically underrepresented groups and emerging ecosystems – VC investors will have to prioritize existing portfolio companies amid shelter-in-place orders and restrictions affecting travel and in-person meetings, meaning underrepresented groups and geographies will face new barriers to access capital as investors fall back on existing relationships and those closer in geographic proximity.
- U.S. share of global VC investment at risk to slip to new lows – The U.S. share of global VC dollars invested has steadily declined since 90%+ in the 1990s to 52% last year. The period with the biggest drop was from 2007 to 2010 when the U.S. lost 13 percentage points. How the U.S. ecosystem works to keep startups afloat, maintain jobs, and fund new technologies will factor into whether the U.S. maintains (or even gains) its ground on the global VC level, or if other countries that rebound faster will continue to close the gap.