Covid-19 and European Venture Capital and Private Equity

Venture capital and private equity data provider Pitchbook is out with a new, fresh look at how COVID-19 might influence the European venture capital (VC) and private equity (PE) market for the remainder of 2020. If you had to guess what the top five takeaways were, what would you guess?

Deep recession drives European VC and PE activity to virtually $0 in 2020? Or perhaps you’re the optimist, thinking that Covid-19 may lead to a very short-term, deep tick down in activity, made up for with an amazing third quarter of 2020?

Without further ado, here are Pitchbook’s top five takeaways on Covid-19’s likely impact on VC and PE activity for the coming months in 2020.

#1 VC Investors Become More Frugal in Response to the Pandemic

For some, this is a sad turn. VC investors looking at European companies will become more frugal in response to the pandemic, spending more time reviewing and evaluating the spending habits of prospective investments.

How can one say this with a chart? It basically means an end to the trend shown below. Instead of a steady increase in first-time and follow-on VC deals in Europe from 2019 to 2020, first-time and follow-on VC deals in the old world will likely collapse, perhaps to as low as what the industry saw in the early 2010s.

#2 Funding Gaps Will Force General Partners Towards Pre-Exiting Investments

When times become more uncertain, investments become more uncertain. The current situation may lead some general partners towards pre-existing investments. Why? Because when cash is tight, investors will tend to stick with companies they’ve already invested in. Funding gaps may push the money that way as well.

#3 Smaller General Partners Will Struggle Attracting Limited Partners More So than Large General Partners

The Covid-19 is no respecter of persons, but it does affect people and industries differently. In all likelihood, the chart below will look incredibly dire when 2020 figures are finally tallied for the entire year in around eight months from now.

The VC fundraising activity in 2020 could fall to lower than what was seen in 2010. That would equate to a drop from around €11 billion in 2019 to perhaps as low as €3 billion in 2010.

#4 Exits Will be Delayed

The fourth takeaway from Pitchbook’s report was that exits will be delayed. In 2019, VC exit activity in Europe summed to over €15 billion, down from the massive €53 billion in 2018, but still healthy.

It would not be surprising to see exit values drop below €3 billion, something not seen in the past two decades.

#5 Recurring Revenue Businesses Could Prove Very Important for Startups in the Ecosystem

The last takeaway from Pitchbook’s take on the Covid-19’s effect on VC and PE activity is that recurring revenue business models could become king. In times like this, cash can become king, which may mean that investable companies that show recurring revenue may see much more favorable deals than companies not pricing their services in this way.

Conclusion

Dealing with Covid-19 has been difficult for every investor across the globe, and European VC and PE investors are no different. Although now may be a good time to put some cash into VC and PE funds, the position of the funds relative to where they were just six months ago is not pretty. Let’s hope for a return to animal spirits and greater confidence in the ingenuity that PE and VC investors have always looked for.