The startup ecosystem is among the many sectors facing a potentially dramatic downturn caused by the virus, as many depend on outside funding or currently operate without revenues. CBInsights reports that globally, private market financing is expected to drop by 16%, or about $77 billion in the first quarter of 2020 – one of the steepest quarterly declines in the past decade.
“The immediate impact to startups will be a slowdown and delay in funding activity while investors of most types try to decide for themselves how much worse things will get and how long the situation might last,” wrote Capital Factory co-founder and President Gordon Daugherty in a blog post on Sunday. “The slowdown will also occur simply due to the increased difficulty of travel and recommended social distancing.”
During this time of rapidly changing news and recommendations from officials, stories move fast. And as the crisis deepens, founders and VCs alike will have to navigate uncharted territory. NTX Inno has been working to gather some insights from the local community to see how the ecosystem has been affected and is preparing for an uncertain future.
Steve Guengerich is the former executive director for UT Dallas’ Institute for Innovation and Entrepreneurship. He is also the author of a number of publications, an advisor at Capital Factory and remains active in Texas’ VC community. His experience at the university also gives him insight into the local early-stage startup scene.
“Startups aren't insulated. Some will fail faster than they would have,” Guengerich wrote in an email to NTX Inno. “But, others, that have already adopted cash-efficient strategies and deliver value will figure out a way to weather this period.”
Already, UT Dallas has been impacted in the way it operates, Guengerich said, with traditional classes postponed for an extended spring break and seed funding investment classes and mentorship meeting being moved to a virtual format.
However, Guengerich offered some advice to startups during this time of financial uncertainty:
“Focus, focus, focus. Move even faster than before on product development - speed matters,” Guengerich wrote. “Cash is king. Leverage every person and organization that is throwing you financial lifelines -- either above the line or below the line, revenue or expense side.”
On the other side, VC firms are also facing some of the same issues in the market. Eric Engineer, a venture partner at S3 Ventures, which has offices in Dallas and Austin, said that while there may be future uncertainty, firms like his and numerous others invest for the long-term, helping insulate them from short-term fluctuations. He added that this month, S3 has added an unannounced DFW startup to its portfolio and has made investments in two of its Austin portfolio companies.
“Some of the most exciting and successful startups of all time were born during difficult economic circumstances,” Engineer wrote in an email to NTX Inno. “That being said, our portfolio companies sell to other businesses and consumers, so they will likely have to manage to slower growth than they set out to do when the year began. Fortunately, given our unique fund structure and decades of experience, we can provide them with adequate capital and resources required to get through a deep recession should it come to pass.”
Like Guengerich, Engineer said that startups should be focusing on cash and extending their runway, which could involve some difficult decisions. In other parts of the country, startups have already begun to lay off workers.
“Rounds will get done but plan for them to take more time. Venture Capital is a people business, so while we have completely shifted to video calls for every meeting, it will make relationship and trust building take a little longer,” Engineer wrote. “On the front end, we often first meet founders at networking events, so not having those will mean a heavier reliance on digital introductions to make those connections.”
While Texas fared better than many other states during the recession of 2008, something which Guengerich attributes to the diverse social and business community and number of wealthy philanthropic organizations. The Atlantic also noted that stable housing market and a mix of stable industries, among other things likely contributed to the softened blow.
It has yet to be seen how the recent crisis will affect the local economy both in the weeks and months ahead. However, on Monday, the Dow Jones Industrial Average fell nearly 3,000 points - on of the largest one-day dives in its history.
Yet, Engineer at S3 remains optimistic.
“Our firm’s entire investment thesis is based on our belief in the relative strength of Texas,” he wrote. “The underlying macro trends that drove Texas’ country-leading growth over the last two decades will continue, and in some ways it might even be accelerated on the other side of a downturn.”
