Phoenix American, a full-service fund administration provider for alternative investment funds, has published a new white paper examining the initial impacts of the COVID-19 pandemic crisis on the venture capital industry. Venture Capital & COVID-19: The State of Fundraising, Historical Downturn Insights & Startup Trends analyzes the effects on venture capital of the first four months of the pandemic crisis and the outlook for the rest of 2020 and beyond.
The paper draws on Phoenix American’s observations as a fund administration provider, conversations with the sponsors of its many client funds as well as interactions with partners, intermediaries and other participants in the industry. The company’s twenty-plus years as a fund sponsor as well as forty-plus years as a provider of fund administration services provides a unique perspective on current events and their effects on investment funds.
Top takeaways from the report include an analysis of the effects of previous economic downturns on venture capital, the current state of VC fundraising, the priorities for VCs during the crisis and key investment opportunities. The report considers several factors of interest.
- Conditions were already changing for venture capital going into the pandemic crisis. Concern for the late stage economic cycle had deal and exit flow starting to stall in 2019. There would be record high dry powder going into 2020.
- Historically, economic downturns have seen substantial contractions in aggregate deal volume, capital invested and deal size. Early-stage companies are hit especially hard. But there is a silver lining.
- Focus on the portfolio. VCs are concentrating on their existing portfolio companies, helping to chart a path to survival and a favorable post-pandemic exit, cutting costs and streamlining operations.
- Investment Opportunities are emerging in remote work and IT solutions including healthtech and fintech with workers largely still at home and health care top-of-mind for many Americans
- Term sheets are changing to reflect greater investor protections in this time of increased risk and due diligence processes are reflecting the same concerns.
- Fundraising. There is no lack of capital with historic levels of dry powder and rebounded inflows but investors are looking for experienced managers who have weathered previous economic storms.
With a perspective coming from the company’s experience with alternative investment funds, Phoenix American emphasizes the need for fund managers to be able to respond operationally to major economic disruptions with innovative solutions to fund raising, cash flow and deal acquisition that are supported by a versatile and robust back office infrastructure – a distinct advantage enjoyed by Phoenix American client funds in the current economic environment.
“The economic disruption of COVID-19 has forced VCs to make rapid changes in the way they operate,” said Andrew Constantin, Senior Vice President, Operations for Phoenix American. “A flexible and robust administrative infrastructure that is able to adapt to the needs of client funds in a time of crisis removes an element of risk and distraction and sets up managers to endure and succeed.”