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SA venture capitalists are preparing for tough times ahead, as the onset of the coronavirus threatens to cut short funding rounds and in some cases place strain on their portfolio companies.
Justin Stanford (pictured above), a general partner of Cape Town based venture capital (VC) company 4Di Capital, told Ventureburn earlier this week that the virus could delay new deals.
“In general, fundraising and deal making is the kind of thing that happens best face to face, and in-person meetings are usually a key part of this.
“As a consequence of these and travel being cut back or reduced to zero, we anticipate this adding sand to the gears of fundraising processes for startups. The risk is mostly to time lines,” he said.
Venture capitalists will have to prepare for tough times ahead with the coronavirus
He said venture capitalists were also likely to become a “bit more cautious” about interrogating the target market and its prospects in this period of downturn.
“VCs may be tempted to reserve more cash for now just to potentially protect their existing portfolio companies if needed through a period of uncertainty. But otherwise I don’t think they are going to completely stop considering deals and looking to invest, as VC is a very long-term game measured in many years.
“The risk for fundraising is more to short term timelines and getting deals done and closed. This will represent a risk for companies that are low on cash runway and are needing to raise soon,” he said.
Stanford’s advice to other venture capitalists and startups is to be cautious and conservative with costs, cash and runway.
“Periods of disruption like this can last months. If a fundraising process was already previously underway, try and close the round as fast as possible and get cashed up.
“If a fundraising process wasn’t previously underway, conserve cash carefully and be cautious, it is unlikely you will be able to start a new process easily now that will move quickly in the short term,” he said.
Kalon Venture Partners CEO Clive Butkow said while the risk exists that a founder of one of their portfolio companies could fall ill, he believed most of the VC’s startups could continue to run even if teams were under quarantine. “All you need is an iPad,” he added.
In addition, he said Kalon had also put in place key-man insurance for all its portfolio companies.
However, he said the onset of the virus has also introduced opportunities for many tech startups.
He singled out one of the VC’s portfolio companies which is involved in sending out mass emails and saw a 30% increase in business through the sending out of emails for clients on the coronavirus.
‘Valuations to change’
On Tuesday (17 March), Manuel Koser, the managing director of Cape Town based investment company Silvertree Holdings, said valuations will likely come down significantly as investors adopt a wait-and-see approach to the virus (see this story). “The best to preserve cash now and plan for the worst,” he said.
HAVAIC managing partner Ian Lessem echoes this. He pointed out in HAVAIC’s regular newsletter to subscribers yesterday that the VC expects valuations, particularly at the earlier stage to move strongly in investors’ favour.
“Firstly due to lower asset prices globally, but also as we expect the supply of corporate and less robust VC’s funding to be removed from the market and thus create a VC capital shortage,” he said.
“As we have always been at HAVAIC, we will of course need to remain cautious and highly selective in all of our investment decisions,” he said.
When it came to the VC’s own portfolio, he said many of the startups had fortunately recently concluded capital raises, meaning in terms of a small firm they had “relatively strong balance sheets”.
“And additionally, being heavily tech-enabled, they are light and nimble and have been able to shift operations to ‘Work from Home’ in most cases,” he added.
“Whilst big, small and individually owned businesses will all feel economic impact, most of our SA portfolio companies service tier-1 corporates and thus non-payment for our services is less likely.
However, he said in East Africa, the VCs’s portfolio services sectors of the market that are already under strain will only face more demand pressure in areas such as logisitics, postal delivery and localised access to financial services including cash.
He said the VC last week issued a term sheet to a company that provides an interoperable network of true contactless payment solutions for sole traders and micro retailers .
“We anticipate that the handling of cash will become more of a health risk, and in the expected downturn, and probable increase in unemployment, more ad-hoc workers and informal businesses will arise, driving micro-payments volumes, shifting away from physical cash transactions,” he added.
In a separate email to Ventureburn, Lessem said HAVAIC had taken a decision earlier this month to offer its extensive financial and capital raising expertise, which previously we only offered to our portfolio companies, to all African startups in need of such support.
Weekly Savca webinar
Meanwhile, the Southern African Venture Capital and Private Equity Association (Savca) said in a statement that the industry body will offer its members guidance in navigating the challenging economic landscape that lies ahead through a weekly webinar series.
Savca CEO Tanya van Lill encouraged investment professionals to download the complimentary “Africa Private Equity News” app, of which Savca is a media partner, to stay apprised of industry developments and proactive measures that can be taken.
“To stay updated with credible and factual details around Covid-19 in South Africa, we have also encouraged our members and stakeholders to join the government’s automated WhatsApp group by adding the number – 060 012 3456 – to their contacts and typing “Hi” in the message block,” she added.
Said Van Lill: “While the road ahead will certainly not be one without challenges, we at Savca will continue to closely monitor the situation and promise to do all we can to protect our people and the industry at large”.
Featured image: 4Di Capital general partner Justin Stanford (Supplied)