While there is a great deal of uncertainty ahead for start-ups, Silicon Valley Bank said the VC ecosystem has weathered recessions before and tech tends to perform well during a recovery.
As start-ups brace for the uncertainty ahead, many groups have looked at the potential outlook for entrepreneurs in the current climate.
In April, EuropeanStartups.co outlined which kind of start-ups may thrive and which may be vulnerable during Covid-19, while Startup Genome looked at how many early-stage businesses may be on the brink of collapse due to the difficult economic circumstances.
In the latest report, Silicon Valley Bank’s State of the Markets for the second fiscal quarter of 2020, analysts looked at the slowdowns and success stories that are set to come out of the crisis.
Silicon Valley Bank’s report opens by acknowledging that the global economy has “rapidly deteriorated” and that loss-making companies with limited runway may not survive.
“There are two reassuring caveats,” it added. “First, the VC ecosystem has weathered recessions before, and tech tends to enjoy a strong relative performance during the recovery. This will be especially true in many segments with direct relevance to the pandemic, such as remote collaboration software and healthtech.
“Second, many of the trends that seem to be emerging predate it. Examples here include the decline of growth-at-all-costs and supply chain shifts.”
The bank said that the innovators it serves are “adaptable and optimistic, but also realistic” about the situation and that many companies may benefit at this time, such as tech start-ups that can engage users while distancing and travel restrictions continue.
The report acknowledged how many start-ups are turning to layoffs and furloughs to reduce costs during the crisis. However, it suggested that high unemployment means that there is an “ample supply of talented workers”, along with lower opportunity costs, which makes recessions “a great opportunity for entrepreneurs”.
Venture capital in the age of Covid-19
According to Silicon Valley Bank, many of the most well-known venture capital firms have been increasing their footprint in the European tech ecosystem, with more deals per quarter than ever before up until the beginning of the pandemic.
“A steady flow of large exits by European companies has attracted this top-tier investment, though a sharp cooldown in exit activity makes for an uncertain future,” the report said.
Silicon Valley Bank noted that “experience matters” for VC firms in tough environments, and that the majority of active VC firms have “never seen a recession”. It suggested that more experienced firms might be more risk averse in a recessionary environment as a result of their previous experiences.
The bank added that it is still unclear whether the economic circumstances could impact the valuations of tech start-ups.
“The link between public markets and VC valuations is somewhat nebulous, but the last two recessions coincided with corrections in the private markets,” the report said. “This time around, valuations are yet to fall meaningfully, perhaps due to larger deals already in the works closing.”