This week, the International Monetary Fund1 and World Trade Organisation2 predicted a deep global recession caused by the economic impacts of coronavirus; and in Barclays pulse survey with SME’s, 84% of businesses also felt a global recession was likely. Sympathetically, it is acknowledged that the world economy is facing a challenging period ahead. Beauhurst have reported that UK funding round deal volume was down 32% in Q1 20203 when compared to Q4 2019, and while there are factors such as ‘brexit’ which may have contributed to this, the 45% decline3 of funding rounds completed in March 2019 against March 2020 must be strongly linked to the impact of coronavirus.
This article focusses on what we can learn about raising equity capital from the 2008 recession, and uses these learnings as a guide for what businesses looking to raise capital should expect to see in the coming months, quarters and years.
The Barclays pulse survey demonstrated that businesses were more concerned about cash-flow and finance for their business (70% of respondents) than they were concerned about their own risk to health as a result of the coronavirus disease (38% of respondents). This amplifies the current sentiment amongst all sizes of businesses of the stark immediate future of the economy, and that businesses are identifying the risk to business health coronavirus poses.
By simply reviewing Crunchbase statistics of the 2008 recession's impact4 on raising equity capital, we see in 2009, Series A, B and C funding rounds measured by funding quantum ($) decreased by 40%, 41% and 46% respectively compared to the prior year. The volume of completed rounds decreased between 27% to 28% in that year4 also. This identifies a sharp decline in venture rounds in 2009, which corrected in 2010 where venture investment superseded funding amount and volume of pre-crash levels in 2007. We interpret this as investment pausing before an exceptional growth caused by a backlog of investment opportunities.
The Crunchbase data also details that Corporate Venture Capital (CVC’s) pulled back in a similar vein during this period, reducing their funding investment ($) by 32% in 20084 and then a further 9% in 2009, before growing investment by 18% in 2010 and another 26% in 2011.
If we are going into a recession, to determine whether the impacts will be similar, we need to take into account some of the differences between 2008 and the current economy. We have recently seen an extensive government stimulus made available to businesses to ease their cashflow challenges. This support wasn’t seen in 2008. We currently see a broader and deeper-pocketed group of Venture Capital (VC’s) with enough ‘dry powder’ to invest in new business opportunities. The majority of scale VC’s have been through recessions before and come out of the other side and notably, new funds formed in 2009 or later4 in the aftermath of the previous crash, include the likes of Andreessen Horowitz and even CVC’s like GV, Salesforce Ventures, and Wayra.
Note that while the government stimulus aspires to fund businesses of all sizes, in its current form it is not a realistic support mechanism for the high-growth, heavy-tech investment businesses, who are not generating a positive EBITDA. Beauhurst believe the Coronavirus Business Interruption Loan schemes (CBILs) unsuitability for such high-growth businesses will increase demand for equity finance in the short-term.
So what does this suggest we are we expecting to see in the current climate and if we go through a recession. In the current climate, expect VC’s to focus on supporting the businesses they have already invested in as a priority. The VC’s who have other available capital may expect to wait before investing, to take advantage of the there being less competition, clearer paths to success with stronger companies surviving, and better valuations as the economic strain and need for capital takes precedence. Expect VC’s to potentially have less capital to invest than they had planned, as some high net-worth contributors to the fund choose not to exercise their call options. All of these factors suggest there will be a decline in equity capital supply.
I expect by now readers are asking, what can businesses do to raise capital if government backed loans are not suitable, and if there is increased demand and a decreased supply of equity capital? The answer is to survive until this capital market re-opens for business by reducing non-essential cash burn. History has shown the market will reopen, and it can do so and grow quickly. Businesses should also look to make the most of the other grant support available such as Innovate UK’s new ‘business led innovation in response to global disruption’ competition (you can hear my podcast with Innovate UK’s Executive Chair Dr Ian Campbell for more information here, or a business can assess whether crowd-funding is suitable for short-term capital at this time.
The previous recession as an indicator, and other factors discussed show that there will be a challenge for business to raise capital at this time, but this does not mean that you should not persevere with trying to obtain equity capital investment. While the data shows that investment declined, it still evidences that investment happened throughout the recession. I was party to a conversation with a local predominant Angel last week who said loud and clearly “it is business as usual, I am still looking to invest into good businesses”. Recession or not, investors are opportunistic and will continue to agree deals and make business investments.
Benjamin is a Funding Solutions and Business Insights Lead for Eagle Labs in Barclays Ventures. Supporting Eagle Labs and their companies for four years, Benjamin set up and ran the first Eagle Lab incubator in Cambridge in 2015, as well as being Head of Region for the South and East Eagle Labs. Previously Benjamin worked in Barclays corporate bank in coverage-relationship roles. Throughout his career, he has supported businesses from start-ups all the way through to multinational corporates and is well placed to support a variety of businesses.