Analysts predict that global seed funding activity could slow by nearly one-fourth by the end of Q1. The pull back is attributed to the covid-19 outbreak, but US seed investors don’t see a drastic drop yet.
Data from CB Insights predicts that seed funding could be down 22 percent by the end of Q1 due to the expanding coronavirus. Seed funding in Asia is predicted to finish Q1 down 37 percent.
Alex Iskold, co-founder and managing partner at seed and pre-seed focused 2048 Ventures, said he entered 2020 expecting a slowdown. But he anticipated a drop off as a result of how seed activity slowed at the end of last year and unrelated to the outbreak and the lockdowns.
(See more of Venture Capital Journal’s coverage of covid-19 and its impact on venture capital at www.venturecapitaljournal.com/vcjs-coronavirus-coverage)
Data from PitchBook’s 2019 venture report found US seed-stage was down 12.5 percent in the final quarter of 2019 compared to Q3.
Iskold, like many other seed investors, said that despite the declining numbers and the spreading pandemic, dealflow so far in 2020 has not only been strong, but has increased for some.
“Last year we looked at 2,200 companies and we are at very high volume right now,” Iskold said. “We didn’t really see a slowdown in the dealflow. As a result, our Q1 was actually very normal.”
Michael Brown, managing partner at seed and pre-seed focused Bowery Capital, agreed. Brown said that his firm has actually seen a slight uptick in pitches as of late.
Both know that the market will most likely start to look very different heading into Q2, but for now seed investors like them are looking to finish the deals they’ve already started.
“What I have in my current pipeline, I want to see through, and then be more cautious and more focused on our go-forward plan and areas of interest in terms of investors,” Brown said he’s hearing from his peers.
He added that Bowery is in the same boat and has multiple term sheets out right now with no plans to change that timeline.
Eva Ho, a general partner at seed-focused Fika Ventures in Los Angeles, echoed a similar plan.
“Over the last couple of weeks, we have started to see some changes, but it’s not uniform,” Ho said. “Our pipeline is still really healthy and I expect it to be healthy.”
Iskold echoed that sentiment and added that 2048 Ventures still expects to close two finance rounds in the coming weeks.
Recent deal announcements show that many other seed investors are also working through their pipeline with the notion of business as usual.
This week, mobile development platform Fritz AI announced a $5 million round led by Foundry Group. Manetu, an information privacy platform raised a $3.5 million seed round led by Castle Island Ventures.
Iskold, Ho and Brown all said that while they anticipate continuing to execute deals through the downturn, they know that the second and third quarters may reveal a completely different market.
“Q1 being down is mostly due to the fact that March is going to be down, quarter over quarter and year over year,” Brown said. “The impact [of coronavirus] will be in Q2. I think the numbers will be off pretty significantly.”
Business continues ‘as unusual’
None of the investors anticipate operating a drastically different due diligence strategy during the uncertainty, but all anticipate asking start-ups different questions and giving weight to more areas of a company’s operations.
Brown said Bowery will focus on such things as a company’s plan for future hiring, how they are prepared for a global recession and how they expect to grow when the market stabilizes. Ho said that Fika has also focused more on questions of company supply chains and possible disruptions there.
“In the past, ‘How recession proof is your business?’ was more of a hypothetical question,” Ho said. “Today, that hypothetical has become a critical question and [the entrepreneurs] have to be able to react to it in real time.”
Ho added that they will also pay more attention to sectors the firm previously passed over. She said that Fika had considered travel infrastructure investments in the past, but wouldn’t in the current environment. Prior to recent events, they weren’t as interested in the healthcare sector, but now are taking a closer look.
“I think everybody is going to have a higher bar on quality and runway,” Iskold said. “Everyone is going to really think about if I write a check today, who is going to write a check 12 months from now?”
Ho agreed that going forward her firm would also probably be more selective with companies and will slow their dealflow slightly if they must.
Iskold said 2048 Ventures could also see a slight dip in deployment.
All three investors agreed that it’s too early to fully predict the market or how their firm will react as things unfold.
“For now, it’s business as usual,” Iskold said. “If we feel that the situation really becomes dire we will just allocate more toward reserves. We will still be investing, maybe not four deals, but maybe we will make two.”