COVID-19 Early Stage Market Investing

Sometimes it’s necessary to let things be for a while. Problems, pain, frustration. 

For the ability of the “why” to build, and not just the “how”. For solutions to float through our created fabrics with their porous membranes. 

The power to play in the space between stimulus and response is incredible. 

As families, communities, businesses and economies struggle, for those of us capable of reflecting from a place of luxurious privilege, this is the time to act with courage and share who we are with the world.

THE INVESTMENT PROCESS AS WE SEE IT
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A rebalancing of total portfolios is already occurring as institutions seek liquid and safer assets. This may diminish the capital toward alternative private market investing. Over the next two years this could help course correct through COVID-19 and simultaneously deal with the decreased liquidity demonstrated over lengthening private market tails (ahem, market-based exits will certainly decrease via both M&A strategic sales and IPOs). 

With respect to returns, it is yet to be seen or understood what the effects of COVID-19 will have on portfolio performance and returns. We are likely to see fewer distributions over the next year.  I am sure some funds are marking down their performance over the past quarter, but there likely remains time to improve on RVPI and residual/total IRR. Older vintages are finishing up, and many have been distributing regularly. How much DPI vs. RVPI each has will of course determine how much COVID-19 may affect their TVPI performance.

The two paragraphs above combine to outline the issue of cash flow. LPs won’t see the distributions expected, but will of course still be getting their capital calls. This distressed position has the potential to freeze up fundraising efforts from funds (GPs).

FUNDS 

Raise

For funds raising in this current and near-term environment, the raise will be difficult. Emerging managers, no matter our backgrounds, will have it even harder (I am saying this to myself as we raise right now more than to anyone else reading). 

So, raising will be slower and more difficult, with established players relying on dry powder from existing LP commitments. 

Investment Pace

Investment pace is likely to slow as a consequence, with most investors supporting existing over selection of new companies. While VCs of all stripes will continue to invest in some way or another (we are not really all open for business), non-traditionals like Angels, Corporates and perhaps some government-sponsored vehicles will pull back. 

Company Growth and Exits

Company growth will slow due to COVID-19 and recession “U” or “L” shapes. This of course will modify exit pathways, types, and timelines as these will of course relate to public markets and corporate M&A activity (strategic and trade). Companies will fail. Funds will fail. Those focused on sustainability and resiliency within sectors and functions that are either counter-cyclical or negatively correlated to oil, CAD$ and CAD public equities (extractive, financial services) will have the chance to limit losses and even grow through the obstacle. 

Returns

Growth impacts exit, exit impact financial return. The volume and value will drop short term (18-24 months). Growth opportunities abound, however, so funds with differentiated theses and focus on companies targeting sectors, themes, functions, geographies that are less saturated, more resilient, and cheaper, have a good chance of success.

COMPANIES

For companies, as we’re experiencing at Marigold with our companies, and as we’re seeing on our monitors, raising and staying afloat will be an understated challenge over the coming 18-24 months. Good news: companies that hold on to their cash will last longer, and spend less “frivolously” on growth acquisition strategies. A slower-growth sustainable company is the new black and it brought sexy back.

There will likely be more churn, especially for B2B companies as corporations reallocate resources over the near term. Lots of negotiations for pilots will stall or be non-starters. Rolling over pilots or annual contracts to next year will be problematic. “Nice to have” is not currently “need to have” = revenue driver in good times is now a cost centre (in bad). Time for companies to reconfigure pricing models and unit economics as necessary to keep contracts in place. 

Largely the same for B2C companies. While streaming and delivery services are seeing strong March-April growth (which I don’t expect to last), purchasing of journalism is currently down. On that final point, consumption of top tier journalism has been incredibly high, and I am sure many large and small media/journalism companies have modelled a small percentage of client retention into paid memberships/subscriptions. Journalism and democratically valuing expert opinion seems to be making a return to developed economy politics… speculation on my part or just a biased perspective as an investor in digital media toward social justice?

As I’ve written elsewhere, companies that keep costs down and show sustainability and resiliency have a shot. Those within sectors we’ve all known about as impact investors that are “emerging” as promising include:

  • Education*
  • Financial inclusion*
  • Food security and production*
  • Future of work (online collab)*
  • Mental health*
  • Privacy and security*
  • Sexual and reproductive health and rights*
  • Supply chain resilience*
  • Healthcare (services and products)
INEQUALITIES

At Marigold we focus on underrepresented groups, overlooked models, and undervalued markets. As we have seen throughout COVID-19, while we all are facing uncertainties and trauma, many of us are experiencing pain and difficulty to a much greater extent: even in a pandemic, inequality runs rampant.

If access to business networks, Angel groups and VCs were difficult for underrepresented founders in the past, there is a good chance that right now access is more difficult than ever before. Access is privilege

In order to stay physically safe, and not incur additional financial losses, will investors retrench to utilizing old and familiar networks and relationships? If so, much of the gender- and racial-diverse momentum we’ve been building may slip away. 

We’re of course seeing opportunities for lasting digital transformation in the ways we work, live our personal lives, view privacy and security issues in the face of civil liberties, healthcare diagnostics and services… which is incredibly important but we must not forget that all of this is built from unequal starting points – who lacks of access, for whom are there prohibitive costs, and who enjoys poor quality of life?

DUE DILIGENCE

I suspect we will see a shift in how investors conduct due diligence. Resiliency, transparency and sustainability of a company’s value and supply chain will first and foremost be considered more so than in the past. Improved down-side modelling and “black elephant” projections will be more commonplace. The scope of due diligence has likely changed forever, for the better.

This will provide ample opportunity for firms seeking value creation for their companies to better incorporate social and environmental considerations that had been previously deemed immaterial. At Marigold we have models that analyse risk and returns that seek to capture the values of the above, but we will surely see more “externalities” be factored into decision making and value creation efforts in the near future.

On that note, content expertise will be more valued. I would argue anecdotally that we are seeing a return of valuing expert opinions. Compare US responses to Germany’s, New Zealand’s, or many other nations. Beyond the fact that some other nations are governed by women, they have also enabled and empowered their experts to inform decision making and execution. 

Bringing this back to investing, sector expertise will become more important as well. Areas of consideration are mental health, sexual and reproductive health and rights, financial inclusion, supply chain traceability and transparency, privacy and security, healthcare patient journeys and products… consumer demands and industry/market penetrations will change shape and experts are to be valued more than ever. Tech for tech-sake alone is no longer an option. Multisectoral, cross functional stakeholders must inform our investment decisions if we are to place smart bets with our childrens’ futures.

Having said all that, at Marigold we look for the social impact that a product/service or model can have on a community, market and its supply chain. In a comparison of classic VC analysis, we look at the tech third. We look at markets second, and we look at the people first. Our job is to find amazing people (leadership AND complementary team to fill gaps) that we trust can build their future success scenarios. 

I write this last paragraph simply to underscore the importance of people in any equation. While we will see iterations of the changes I suggest above, we likely will not when it comes assessing, trusting and valuing people. This has always been essential, and as we emerge post-COVID-19, we will likely need to double down on people analysis. 

* → Marigold Capital Investment Themes and Sectors

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