COVID-19’s Influence on the European VC Market
How the pandemic will affect the dynamic between startups, GPs and LPs
As the havoc wrought by the COVID-19 pandemic proliferates, the momentum that catapulted European venture activity to record levels in 2019 will abate this year, according to PitchBook research analysts in their latest note dedicated to the continental VC environment. Funding gaps will force GPs to pivot attention toward pre-existing investments; smaller and less-established investors may struggle to source LP commitments; and exits could likely be delayed. However, SaaS-based recurring revenue business models will prove even more vital in the current environment. The note details further ramifications across every other aspect of the venture market across the continent, from funding gaps to cash flow management by startups.
We expect the momentum that catapulted European VC deal activity to record levels will abate in 2020 as VC investors become more frugal in response to the pandemic-induced crisis. Deal terms are likely to turn in favour of investors as rounds become riskier.
Funding gaps will force GPs to pivot attention towards pre-existing investments. Startups relying on the gig economy and direct consumer spending will soon be facing cash shortages. GPs will concentrate on cash flow and resource management in the near term to ensure companies in their portfolio stay afloat, and holding periods could increase as they opt for extension rounds and follow-on rounds.
Capital provision will inevitably decline from the heights seen in the last five years as VC fund managers and LPs will be more pragmatic. Smaller and less established GPs may struggle to source LP commitments as travel restrictions impede their ability to develop relationships. Funding rounds with US investor participation will fall.