Coronavirus cripples funding in young startups as investors redirect focus on conserving cash

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Updated: March 23, 2020 3:26:37 PM

The Coronavirus may have a similar impact on startup funding that previous virus outbreaks like SARS and Zika had in the impacted regions.

Coronavirus impact is predicted to be less severe with respect to deal volume in seed deals.

Amid the expected global slowdown in startup investments due to the Coronavirus outbreak, the seed-stage financing would perhaps take the maximum hit with 22 per cent likely fall in the first quarter of 2020 vis-a-vis 5 per cent growth in the preceding quarter and 9 per cent growth in Q1 2019, showed data by market intelligence platform CB Insights. “The acute decline in seed-stage deals can be attributed to compounding economic factors — including uncertainty due to the spread of coronavirus,” the company said. Overall startup funding is expected to go south by over 16 per cent to $77 billion in Q1 2020 as compared to $92 billion in Q4 2019 and down close to 12 per cent versus $87 billion in Q1 2019.

“I would, unfortunately, agree on this. Public markets are completely down. So liquidity is dried up and so angel investors, individuals, other investors are focusing on conserving their cash. Also, since they have an investment in some good companies, they would think to park a little bit of their money to help these existing companies rather than investing in new companies,” Padmaja Ruparel, Co-founder, Indian Angel Network told Financial Express Online.

The impact is predicted to be less severe with respect to deal volume in seed deals with only 8 per cent fall in Q1 2020. However, the negative impact on Asian startups is likely to be starker with the slump in both deal value and volume. Asian seed funding is expected to decline 37 per cent while deals are likely to fall 24 per cent in the said quarter from the previous quarter. While large investors are focusing more on managing their existing portfolio companies instead of sourcing new deals, angels and small venture capital funds, which make up for majority seed-stage activity, are less likely to invest in the current scenario.

Also read: Coronavirus crisis: Lower demand hits small businesses, startups hard; cost-cutting likely ahead

“VCs are doing the same thing that angels are doing. Because it is isolation, you are not able to talk to startups. How long and how many deals can you close by connecting online. You cannot move from one building to another. You cannot close deals like that. Also, I know a lot of portfolio companies will miss their growth projections since a lot of cash is diverted to Coronavirus-related expenses. Coronavirus will be one major factor for startup shutdowns or failures in 2020,” said Ruparel.

The Coronavirus may have a similar impact on startup funding that previous virus outbreaks like SARS and Zika had in the impacted regions. For instance, due to the SARS outbreak in November 2002 in Southern China’s Guangdong province that spread to more than 12 dozen countries, private investments in Asia for 2003 and 2004 stood at just 27 per cent and 29 per cent respectively below 2002 levels, according to CB Insights, until Q3 2004 when the recovery was visible.

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