It’s time to talk about everything that’s playing out on the global stage right now.
Crisis. Pandemic. Recession. A few months ago, who could have guessed these would be words we’d end up hearing on a daily, even hourly, basis?
The fact is, you never know when a novel event, like COVID-19, could come along and rattle the global economy. But that doesn’t mean we need to panic. This crisis will pass eventually – and in the meantime, I’ll be here to guide you through whatever may come.
On that note… This Thursday, March 19 at 2 p.m. EST, I’ll be hosting a live webinar for members of the Angels & Entrepreneurs Network. I’ll be covering all the important things you need to know about this turbulent time – and then I’ll answer any questions you still have. If you’re already a member, you should have received an invitation by email yesterday. If you aren’t, you can learn more by clicking here.
This week, I’ll be coming to your inbox with a two-part series on how coronavirus and its impact on the public markets could affect startups and their angel investors. I’m here to tell you the complete truth – so it might sound a bit scary at times. But by the end of it, you’ll realize one simple truth: things are going to be okay. We are going to get through this.
We have a lot to cover… so let’s dive right in.
Coronavirus: Just one piece of a larger puzzle
Like I said, a few months ago, most people wouldn’t have believed a storm of this magnitude was coming. But maybe we should have seen that something was coming.
If you look at the big picture, things have been slowing down in the public markets for a while now. Some of the biggest private companies that were planning to go public – like Airbnb and Palantir Technologies – decided not to proceed once they saw their peers – Uber, Lyft, Peloton – get slashed to pieces on the trading floor. Some outcomes were even worse. Remember what happened to WeWork?
Luckily, most angel investors don’t lose too much sleep over price fluctuations post-IPO. After all, by the time a company goes public, its earliest investors have typically made their money back – tens, hundreds, or even thousands of times over.
But while all this doesn’t directly reflect what’s going to happen next in the stock market, it certainly means something when it comes to investors’ overall optimism. In this case, a decade of startups putting outsized focus on “growth at all costs” had already sown seeds of doubt that began to sprout in 2019. Think about it this way – when all the biggest companies are afraid to enter the public market, what does that say about the market?
Keep in mind that all this was going on long before COVID-19 took the stage. And the impact of the virus on the stock market is not just evident – it’s staggering. So it’s not too much of a surprise that the vast majority of publicly-traded companies are getting clobbered.
Exactly why the stock market matters – even for private companies
To put it simply, an inhospitable IPO environment could lead to a “traffic jam” in the startup funding life cycle. When more and more huge companies decide to hold off on their public debuts, they’re essentially keeping more VC dollars tied up in illiquidity. That could mean that there’s less capital floating around for the smaller fish.
Most angels prefer to invest in the seed round – the first round of financing a startup completes – in order to get the most equity per dollar. (More on how that works here.)
But eventually, every startup in your portfolio will need more money. And if VCs aren’t investing in Series A rounds, that could spell trouble for a lot of fledgling companies. In many cases (though not all), a startup that can’t make it to the next financing round is one that makes investor money disappear.
But things are going to be okay – and here’s why
I get it – a lot of scary ideas are floating around here. See, I wanted to make sure you know exactly what the worst–case possibilities are, especially since we have no idea what will happen next with COVID-19.
But now let’s refocus on the bigger picture… because despite all these looming storm clouds, we are going to be okay. In fact, this could be a better time than ever to start honing your angel investing skills. Here are a few reasons why.
- Angel investing is a long-term commitment.Over the past two months, we’ve watched the world get turned upside down. And it’s just getting started. In an official statement earlier this week, President Trump estimated that the effects of coronavirus on our economy and society could persist through July or August. If he’s right, that’s eight months of chaos we’ll end up dealing with.
But if you invested in a startup today – or even six months ago – the odds of an exit within that time window are minute. A typical angel investment takes two to 10 years to yield a return; the average holding time is 3.5 years. By the time your portfolio companies reach maturity, the effects of this crisis are likely to be long past.
- Many VC funds will continue to operate like normal.It can take months to years to fill a venture fund completely – $20 million is about the smallest size you’ll see, and the average is well over $100 million. Right now, there are many funds in varying stages of completion – and many that are already full.
The managing partners of these funds aren’t just going to sit on their hands while this all plays out. Their funds are effectively already raised. And with deal terms on track to improve as the market adjusts, they may be even better prepared to deploy that capital to startups in need.
- Deal terms are likely to improve.This experience is going to be a reality check for startups as they head into their next funding rounds.
I’m already seeing this happen… and it’s a good thing. For the past few years, investors have had to deal with startup founders raising money at unrealistically inflated valuations.
But now more than ever, they’re going to need to justify every penny that goes into their valuations. I suspect a great deal of them will find they can’t quite justify that $50 million ask before they’ve earned any revenue – which means they’ll have to raise cash at a lower valuation. Just like with real estate, stocks, and groceries… the best time to buy is when the price is low.
If you ask me, this could be one of the biggest turning points in angel investing history. The stars are aligning for good, solid companies to emerge from the crisis as titans – potentially producing enormous returns for their investors.
But only those investors with a proven strategy are likely to pick the right deals. Without a data-driven, analytical approach to due diligence, the odds of rushing into subpar deals is so much higher. In conditions like these, it’s sink or swim.
Which is why I’m here. Between my decades of experience and the Research Team’s meticulous attention to detail, we have this process nailed down pretty well. We’ve even boiled it down to a simple algorithm we call the 1,000X Formula.
It’s an elegant, refined system – and yet it’s so incredibly easy and accessible that anyone could use it. And in times as uncertain as these, it’s more important than ever to lean on logic and rational thought.
And keep a sharp eye on your inbox. I’ll be back later this week with Part Two of this series.
Until next time,
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March 18 2020