While a handful of tech companies like Zoom and Shopify are making huge gains thanks to COVID-19, obviously that's not the case for the most part. Weaker demand, slower sales cycles and customers' insistence on price concessions and payment deferrals conspired to cloud the growth prospects of many technology companies.
Complementing these challenges, many tech companies are struggling to raise capital when they need it most. The data so far suggest that investors, especially those focusing on previous stage financing, are taking a more cautious approach to new operations and valuations as they wait to see how individual companies behave and how the economy will go. With the outcome of their planned equity financing uncertain, some tech companies are revisiting their financing strategies and exploring alternative sources of capital to fuel their continued growth.
Predicting growth in a pandemic: difficult work has just become more difficult
For some companies, the impact of COVID-19 on revenue has been immediate. For others, the effects of a slower economic activity and tighter budgets emerged more gradually with agreements in the funnel before the April and May pandemic closed. In any case, in the second half of 2020, technology CFOs face a common challenge: how to accurately predict sales when there is very little consensus on key issues such as when commercial activity will return to pre-COVID levels and what are the effects long-term crisis could be?
Unfortunately, navigating this uncertainty is equally daunting for investors. Nowadays, the valuation of equity investors on a company's growth potential and the value they are willing to pay for such growth are not only influenced by their vision of the company itself. Equally important are their assumptions about when the economy will recover and what the new normal might look like. This uncertainty can lead to situations where companies and their potential investors have substantially different opinions on the valuation.
Longer financing cycles, more favorable offers to investors
While the full impact of COVID was deemed too late to have a material impact on the first quarter's business volumes, data recently published by Pitchbook and NVCA suggest that 2020 will see a significant reduction in the number of companies funded, probably by as much as 30 percent compared to 2019 among the top companies. And, while it often takes several months to see evidence of broad investment trends, anecdotal evidence indicates that investors are trying to mitigate risk by asking for additional protective measures.
Source link
