With Marcin Szeląg, Partner Innovation Nest and Elbruz Yilmaz, Investment Director 3TS
Here is the third episode of the 0100 Conferences 3TS podcast. Below, you can find the key messages that Marcin Szeląg, Partners at Innovation Nest and Elbruz Yilmaz, Investment Director at 3TS Capital Partners, discussed about the impact of the COVID-19 crisis on the VC industry.
Innovation Nest is an investment fund focused on early to Series A stage B2B technology companies with a global focus. Their investment range is from €100k up to €1M. While their first fund has been focused on Poland, they now invest across Europe.
Q: What impact of the COVID-19 pandemic have you seen so far in the VC industry?
A: The last few weeks were all about catching up with portfolio founders and discussing the impact of loss of revenue on runways and what is the strategy to survive the next few months. That has been pretty hectic as we have over 30 companies in the portfolio and I think pretty much every single one of them was somehow impacted by the coronavirus.
On one side, we are seeing a huge and sharp decline in revenues for many industries, like travel or hospitality. On the other side, there are some areas that are benefiting from the situation, like all sorts of online tools. Portfolios of different fund managers thus see different impact depending on their exposition to different industries.
Also, we see that depending on when companies raised money last, their situation differs greatly. Companies that have recently raised money might be pretty safe to survive this market condition. On the other hand, companies that have raised 12 or 18 months ago, with the assumption to raise more money this year, are in a tougher situation as their cash is running out. Even though VCs are communicating that they are open for business, if you look at the details, for some companies it might be still impossible to raise money now. I think many companies will not survive this crisis.
Q: Do you think some founders are more prepared than others based on their experience with previous crises?
A: I think this situation is unprecedented as the global economy came to a sudden stop. Whichever past crisis you pick, the economy didn’t stop like this, so I don’t know if anyone could have been prepared for this. Also, our portfolio founders are 30-year-old’s, so they probably haven’t experienced previous financial crises in such extent.
I think people are handling this in different ways, depending on what the actual situation of the company is. Overall, founders will have to be very creative in finding solutions. At the end of the day, you can scale back to three people, basically the founding team, and you let go all of your employees. Of course, it will set you back several months in terms of where you are, but if that’s what is needed then that’s what you probably have to do. I think this is going to be like a good cleansing exercise within the industry. I think the most resilient founding teams will survive.
Q: What do you think will happen to the money that is currently under management but not being deployed?
A: There’s been a great post published by Joyce Mackenzie and she wrote that in terms of European VC, there’s around 1.5 trillion of assets under management right now, dry powder to be deployed. The thing is that a large part of that sum is in series A and above funds. So, maybe it’s not going to be that different, once this is all done, because the number of series A companies or financing rounds in that stage has been pretty much stable over the years. The number of people trying to build companies has exploded, but then pretty much the same percentage of companies has been graduating to series A. I think there will still be plenty of opportunities for the larger funds to deploy money. Will whole investment strategies shift, and the focus areas people are looking for to deploy the capital in change? I don’t know.
Q: Do you think investors might lose appetite for travel industry for example?
A: I don’t think so. I’ve read a few different posts that are speculating on the post-corona travel environment and they are quite positive. One statistic says that pre-corona there has been 1.2 billion global travelers and they are estimating that within the next few years it will be 1.5 billion, so another 300 million people will travel. It is a nature of people to want to travel and experience new things, and I don’t think the virus will change that.
When it comes to investment themes, it’s pretty clear that now everything online got a huge boost and there might be a bit more focus on those areas. However, I think that the investment activity in areas that touch the physical world will not stop either. Services like TourRadar which you are in with 3TS or GetYourGuide, they won’t go away. I think people will come back and want to experience these things again. I actually think it will be more amplified, as people will crave these experiences after the lock-down.
Q: What is your take on valuations these days, how should entrepreneurs and investors go about them in this environment?
A: It’s a difficult topic, because you have both sides of the table. If you say that nothing really changed or nothing really happened and it is business as usual, that’s obviously not true. If you look at forecasts, they have to be recalculated and you have to look at what can actually be done in the next few months. But I also think that taking advantage of the situation with very bad terms might not be the right thing to do on the VC side. I think the valuations at which financing rounds are done now should be somehow adjusted to the situation but it shouldn’t be predatory.
Q: What is your take on the exit and M&A activity coming up after the crisis?
A: If you look at how many companies have been funded in the last two years, we can assume many of them can survive this. So I think there will be plenty of M&A opportunities. The question is what is going to be the underlying argument for those M&As. I think in most cases it will be consolidation driven. And by that I mean rather competitors consolidating different markets, rather than financial investors buying companies.