April 3, 2020

Where did all the VCs go?

Where did all the VCs go?

We, like many other VCs, have begun reviewing our portfolios on a regular basis in response to COVID. It will and often already has had an impact on our companies’ trajectories and runway. Safety lies in companies that can create a plan that gives them 18–24+ months before they run out of cash.

This safety comes from a large assumption: avoid the need to raise during the depths of the crisis. Doing so optimizes the likelihood of getting funded, and at a fair price. (My colleague, Guy, provided a framework for our portfolio companies to plan accordingly. You can find it here.)

It is always better to have options, and cash on the balance sheet creates those options. One of those options may be raising in the next 6–18 months. It’s unlikely the venture market will become so risk-averse that it dries up!

Fundraising cadence

In steady-state, entrepreneurs optimize fundraises based on standard cadence. They plan to raise every 18 mo. (plus or minus) coincided with when they might need capital. Some wait until they’ve hit a “qualifying milestone” (e.g. $1M, $3M, or $10M ARR). And, though it is becoming less of a factor, they avoid late summer and winter holiday slowdowns.

COVID-19 is disrupting this cycle. Across stages, VCs are reporting a drop in “top of funnel” activity in what should be a busy time of year. Many compounding factors are driving this slowdown.

Heads or Tails?

COVID will dictate companies’ fundraising strategies over the next two years. Each startup falls into roughly one of these categories:


Stimulus: Many companies will experience no or negative growth over the next few months. Demand for their product is either

  • Elastic — Some customers will cut non-core expenses. Some prospects will pause non-core purchases.
  • Inelastic but with an affected customer base — Some customers experiencing a business decrease can’t afford payments. Some prospects seeing an increase in their own business and can’t be distracted by vendors.

Growth rate: negative to flat

Example software companies: Eventbrite, Toast, MindBody

Example industries: Events, Restaurants, Travel & Entertainment, Real-estate, Transportation, Health & Wellness services

Response: Startups are adjusting burn rates, hunkering down, and getting creative. Many will introduce product extensions, pivots, remote offerings.

Those with weaker balance sheets are pulling together bridge rounds. Beyond that, it will be a long time before these companies choose to go out to raise. I expect 18 mo or so (6 mo. of direct impact + 6 mo. of transition back to steady-state + 6 mo. of rebuilding their business metrics in a way that will be attractive to funders).


Stimulus: Companies will continue to grow throughout this crisis, even if slower than planned. Most of these companies will have recurring (versus transactional) revenue models. Demand for their products is inelastic. Their customer base is fairly insulated from COVID. Or, there might bee positive and negative impacts that feel like they cancel each other out!

Growth rate: flat to positive

Example software companies: PagerDuty, DropBox, Twilio

Example industries: Horizontal ERP systems and core workflow software, logistics, security, insurance, finance

Response:. These companies will have more options than those in the prior category. They won’t see the same disruption to their core business… and won’t feel like they should take a bit hit in fundraising.

Even so uncertainty and volatility will prevail. Those planning to raise during the annual springtime surge will stall. Raise timelines will extend or delay. This build-up will lead to a rush as we transition out of shelter-in-place and return to some semblance of normalcy. (Before then, VCs will only fund companies led by founders they know, and have known for a long time.)


Stimulus: Demand shifts induced by COVID will drive growth in some cases. Think of virus response, shelter-in-place, travel restrictions, and market volatility.

Growth rate: positive (and accelerating?)

Example software companies: Zoom (obviously). RobinHood (gah!), Instacart (🙏)

Example industries: Remote work, telemedicine, business continuity, grocery, last-mile logistics

⚠WARNING ⚠ Tailwinds may be permanent or temporary. Permanent tailwinds occur when consumer behavior or regulations change and remain after COVID. It is difficult to forecast which trends will last. (Full remote work will not be a thing like some on twitter proclaim!)

For example, even Zoom is confusing:

  • Permanent — my fiancee’s company switched from WebEx to Zoom. They are unlikely to switch back once we resume normal work
  • Temporary — my yoga studio began to offer classes via Zoom, at 1/3 the cost. They will switch back to the profitable in-studio classes as soon as possible

Investors will struggle. Which companies are on a new trajectory? Which are feeling an on-trend lift?

Response:. Like companies experiencing headwinds, expect many of these to raise immediately. Unlike those with headwinds, they are bulking up to service the oncoming wave of demand.

After that, its heads down for the duration of the crisis. Servicing customers, and not engaging investors, is the priority. Investors will watch for more signals of lasting fortune.

What’s next?

Today’s financing announcements are of rounds closed at or before the beginning of COVID. There will not be as many announcements “tomorrow.” Fewer rounds will close and of those that do, many will be inside rounds.

The good news: fundings will come back! It’s not if but when… there is $188B of VC dry powder this year. (Pitchbook has done a nice summary on this point.)

It will start with existing portfolio companies, needing to stock up for a long winter or fill the war chest. Few companies will close financings in the next quarter or so. Those that do will likely raise from VCs they’ve known for some time.

The first wave of findings will come as society remerge post-COVID. It will consist of companies that were largely unaffected by COVID’s prevention measures.

At least six to nine months later, companies with COVID-tailwinds will come out to raise. They’ll have reached some semblance of normal operations. VCs will feel comfortable underwriting the business. The new normal of valuations and terms will be known.

Of course, throughout, cash is still king. Better be in control of one’s destiny than caught in a rough time to fundraise.

Originally published at