SA国际传媒

No one expected that a virus would push the first piece in a domino effect that is leading to a global economic crisis.听

But here we are.

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Investors in Europe are reacting in similar ways to their U.S. counterparts — sailing by sight and timing is everything.

鈥淚f we have a prolonged epidemic in the U.S. and in Europe, we might be at the cusp of a recession which might take years to solve,鈥� said , partner of venture firm.

Indico has dual headquarters in Lisbon and Madrid. Its portfolio includes companies from Portugal and Spain, the latter severely affected by the epidemic, with over 47,600 cases and 3,434 deaths as of March 25–a mortality rate already above China鈥檚, where the virus originated.

鈥淚n this scenario, investors will just focus on their own portfolio,鈥� he added

Only six of Europe鈥檚 66 most valuable tech and internet companies managed to post gains in the wake of the coronavirus crisis, according to a reported titled published March 24 by Dealroom. Losses ranged between 5 percent and 67 percent of pre-crash market value.

With still no data on deals for 2020, one can say with certainty that will be far from the record number of 鈧�293 billion of investments ($321 billion) made in 2019 in the continent.

Now, according to de Morais, the mantra among investors is, 鈥渃lose rapidly any pending investment rounds and put on hold new investments.鈥�

Defensive posture

The immediate focus for European investors is to defend their portfolio, according to several with whom I spoke.

Managing the existing cash flow of portfolio companies is now paramount — mainly through rationalization of costs and more sales to liquid companies and consumers. To deal with the shortfall, some companies are resorting to human resources strategies such as forced holidays and two- and three-month furloughs to avoid redundancies.

鈥淪ome companies are considering taking on venture debt. Not good advice: it鈥檚 not for everyone and we have to consider that in this environment fundraising will be very challenging,鈥� said, a partner at London-based.

However, many investors are fretting over the perspective of fresh injections of funds to keep things rolling. Some VCs contacted by SA国际传媒, while refusing to be quoted, have said investors are retreating their term sheets, effectively pulling the rug from under founders鈥� and their teams鈥� feet at a time when fresh capital is more than needed to keep businesses operating normally–and to avoid layoffs.

鈥淕ood and honorable investors would continue in the same way as before,鈥� said, co-founder of Barcelona-based firm . 鈥淲ho takes advantage of this kind of situation will be marked and exposed by the startup ecosystem.鈥�

Shifting ecosystem

Meanwhile, besides analyzing cash positions and non-essentials costs, founders have been challenged to find new ways to sell their wares. A wartime mentality has set in as teams try to redirect their businesses toward answering the new necessities born from prolonged lockdowns and state-enforced quarantines worldwide.

Those best positioned to do so are sectors aligned with the needs of the millions under confinement, namely e-commerce, health, communications and home delivery startups. The Dealroom report notes that public companies such as video conferencing company, digital-only supermarket and telemedicine startup have been outperforming the market, all three posting significant growth of their market capitalization numbers since the beginning of the crisis.

On a smaller scale, pet food home delivery company, part of Indico鈥檚 portfolio, has seen its business grow since lockdowns were imposed in its three main markets, Italy, Spain and Portugal.

鈥淭his crisis might accelerate digital transformation and changes of behavior of more conservative consumers,鈥� added de Morais alluding to the rise of Asian e-commerce giant, which had seen its business consolidate during the SARS outbreak in 2003.

Early-stage startup, a Draper Esprit鈥檚 bet, developed a cloud-connected camera able to turn a whiteboard into a slide. Initially devised as a B2B product, with the immediate rise of homeschooling its potential as a teaching tool has been a听 boon for the company. Kaptivo sold more units in March than in all of 2019. However, noted that 鈥渘ot all companies can change their model overnight. It requires planning and obviously funding, and not every company has the ability or will be in the position to do that.鈥�

admitted as well that, in the case of not-so-lucky companies: 鈥淢y recommendation would be pivot fast, extend cash reach to the maximum or restructure to reach cash flow positive.鈥�

Cash-burning companies might be up for very hard times in the near future if the current slowdown drags on.

鈥淭hose companies are being told to present plans in which cash burn is lower,” said de Morais. 鈥淥ne of the problems with those companies is that some founders, because of their age, never had to deal with a similar situation. They might find it difficult to overcome all this in a rapid manner.鈥�

offered a more optimistic perspective.

He said, 鈥淎lthough the priority is to support our existing portfolio companies, we are not closed for business, far from it. History has taught us that some of the biggest tech companies in the world were often founded in similarly big crises and that innovation is fueled by challenging times.鈥�

Article written for SA国际传媒 News by Pedro Garcia, a journalist based in Lisbon, Portugal, covering mainly business and economic themes. Follow him on .

Photo by Giacoma Carra on Unsplash.