After raising a decade-high $2.2 billion in venture capital funding in 2019, Chicago startups could never have predicted how the coronavirus would bring some businesses to a screeching halt and freeze revenue growth seemingly overnight.
Chicago tech companies large and small have begun laying off and furloughing staff as they aim to cut expenses and extend runway in order to survive the economic downturn. Chicago-based SpotHero, a company that connects drivers with off-street parking, laid off employees as the parking industry saw volume plummet 90 percent. Groupon, which offers deals and discounts to local merchants, will terminate or furlough almost 3,000 workers due to impacts from coronavirus-related shut downs.
Chicago startups looking for venture funding to stay afloat will find VCs who over the last two months have largely pumped the breaks, doing fewer deals and becoming more selective of the startups they back. Local investors expect both deal volume and the amount of money invested to decrease in the near term, and startup valuations are already on the decline.
"There's a whole bunch of business models that just don’t work right now," said Jonathan Ellis, founder and managing director of Chicago VC firm Sandalphon Capital. "There's some startups where revenue has gone to zero."
Ellis said startups in Sandalphon's portfolio run the gamut in terms of how COVID-19 has impacted their business. Startups around food delivery and telemedicine are thriving, while others are going through difficult decisions around cost-cutting and layoffs. One company had to pause operations all together and furlough almost everyone on staff.
"No one in their investment thesis has a risk factor of you wouldn't be open for weeks at a time," Ellis said.
Startups that were in the process of raising a round when the coronavirus hit were left with an especially difficult situation.
"Anecdotally, we heard of folks who were fundraising and suddenly all the angels vanished on them," Ellis said. "VCs suddenly turned around and said, we love this but we can’t invest right now."
Steven Galanis, the CEO of Chicago startup Cameo, said he feels fortunate that the $50 million round his startup raised last year has given Cameo more than a year's worth of runway, and the ability to wait on raising another round.
"There’s a lot of companies that might not survive this, especially if you're early stage. Getting funding done is hard," Galanis said. "I’ve heard of multiple companies that have had term sheets pulled (in early March)."
'Open For Business'
In a survey of more than 60 Midwest venture firms conducted by Sandalphon and shared with Chicago Inno, just a quarter of investors say investing is "business as usual." Roughly half say they are focused primarily on their current portfolio but are taking meetings with intent to invest in the near-term.
That sentiment is shared by several Chicago investors interviewed by Chicago Inno, each expressing a similar sentiment: Deals will get done, albeit at a much slower pace, and with a more critical eye toward companies that can survive in today's "new normal."
"In these environments, it's the best companies that survive."
"We are open for business," said Jason Heltzer, managing partner at Chicago-based Origin Ventures. "Our priority is on our portfolio companies now. At some point those companies will be on their new paths and we’ll have more attention for new deals. But we have capital that we intend to put to work."
Founded in 1999, Origin has experience investing through multiple economic downturns, Heltzer said, adding that dips in the economy can often be a good time to invest in startups.
"In these environments, it's the best companies that survive," he said.
Kevin Willer, general partner at Chicago Ventures, said his firm has done three deals so far in 2020 and has deals in the pipeline, but said he believes the pace of new investments will likely decrease.
"I suspect it will slow down a bit over the next quarter or so for new investment opportunities," Willer said. "Any downturn or any crisis, it always has forced people to think differently."
A Look at the Data
In the latest Venture Monitor report from Pitchbook and the National Venture Capital Association, Chicago VC funding dropped slightly in Q1. Chicago startups raised $351 million in the first quarter of 2020, which was down from $483 million a year prior and $365 million in Q4 of 2019.
Q2 is likely to tell a different story, as the data catches up with the slow down in the economy. The pandemic is having a "massive impact on startups and VC investors," according to the Pitchbook/NVCA report.
"Investment pace will likely slow down if shelter-in-place orders are still in effect once deals that were already in progress or in the pipeline are completed, since VC is a business that revolves around in-person meetings with founding teams before making an investment," the report stated, adding that fundraising will also slow down "as LPs assess the situation and analyze their asset allocations."
"Everything has slowed down for new investments," said Victor Gutwein, founder and managing parter of M25. "It feels like 2020 is going to be a lot harder to fundraise in."
Gutwein said M25 is still doing new deals, but he believes it will be a much slower process than before the COVID-19 outbreak.
"It's likely Q2 will be a slower quarter for us," he said. "We’re a little more cautious."
With deal terms being less generous to founders looking to raise new rounds, Gutwein said he's advising his portfolio companies to hold off from raising from new investors if they can.
"Valuations aren’t going to be as favorable," he said.
On the bright side, investors nationally had $121 billion in dry powder as of mid-2019, according to Pitchbook, and several Chicago VCs have recently raised large funds, including Hyde Park Venture Partners' $100 million fund in December and ARCH Venture Partners' $1.5 billion fundraise across two recent biotech-focused funds. Origin Ventures is also raising a new fund, which has a target of $100 million, according to an SEC filing.
Impact on Chicago Tech
There's no doubt that the coronavirus is having a material impact on the health of many Chicago startups. But investors believe the foundation that's been built in Chicago's tech ecosystem will allow the city's startups to weather the storm, even if there are casualties along the way.
"The roots of the tech ecosystem and support system here are deep enough that there will be many resilient companies that will succeed," Heltzer said.
Pete Wilkins, the managing director at Hyde Park Angels--which has made five investments in the last eight weeks---said the maturity of the city's innovation hubs and support organizations will help Chicago's startup community withstand the impacts of the virus.
"I think we can emerge stronger than ever," Wilkins said. "This ecosystem is strong enough to be able to survive and as a result, new ideas will emerge."
But Wilkins admits that the coronavirus has caused Chicago's tech momentum to slow.
"We had the wind in our sails, and the wind is gone," Wilkins said.
Organizations like 1871, health-tech hub MATTER, manufacturing incubator mHUB are coming together to find ways to fight the ongoing coronavirus crisis, tapping into their resources to both combat the virus and help the tech community that's been negatively impacted by the outbreak.
"When the name of 1871 was chosen, it was chosen with purpose," Heltzer said. "The devastation is not the same as the Chicago fire, but we certainly are a town that is resilient and can come back from something like this even stronger."
Featured image credit: Amit Misra/Getty Images
