VNX successfully launched a series of LIVE online interviews with industry leading experts, VCs and entrepreneurs. The first LIVE interview was held with Michael Jackson, Board Member of Volvo, former partner at Mangrove Capital (VC Fund) and former COO of Skype.
Here are the key takeaways from the interview:
If you look at the fundamental facts, during crisis VC/PE firms (like any other company in the world) focus on 3-4 key priorities. Referring to the McKinsey article, these priorities are: taking care of employees, ensuring continuity of critical processes and prioritizing the portfolio. New investments are way down in the agenda. The key question is how long is that going to be, but of course once the VC is stabilised their task is to invest money.
The support depends on the type of SME. Established SMEs need liquidity (cash or ability to raise money). VCs are a one source, but another is government support. We see a very high commitment from the Luxembourgish government and all European governments to support the SME environment. The most important thing for SMEs now is to be aware of what government support programs are, how you can get the cash and benefit from them.
The current situation will change our life. People start more actively using remote access systems, telehealthcare, etc. and there are lots of opportunities are coming out of these. Try to imagine how the world will look like when everything will calm down. Services we need will be different as we change the way we work and the way we interact.
VCs raised capital before the crisis and they still have commitments from their investors (LPs) to deploy the money. So the money is still there, and VCs will be looking for better deals.
We can expect the correction of the valuation of startups. It will decrease, especially in some areas with very high valuation which was difficult to understand, for example UK Fintech. Part of that was driven by corporate VCs which didn’t really care about the prices. Now they most probably will change the preferences and focus on their short-term priorities.
VC is a very personal business, previously it required to have personal meetings and startup pitches in the office of VC Funds. Now the situation is changing, even virtual Annual General meetings are now permitted in some jurisdictions. The basic process of syndication and fundraising can be digitalized and even extended to crowdfunding. Share ownership either directly or through tokenization platforms will allow private investors to access small businesses. Digital investment platforms can play a part in funding companies. Their main role is to democratize the traditional ways of funding and make them accessible and easy.
The number of questions we received from our webinar participants was really huge. We provide answers of Michael Jackson for some of them:
Q: Will this crisis change your criteria for investing in startups going forward? What about sectors?
The fact that there has been a crisis will not change criteria (good team, good market, large prize, etc.). But we have had a major shift in adoption (and rejection) of various sectors. If I believe that these changes will last, then I am more likely to consider companies that address them since they got a great jump start.
Q: Should VCs change their investment strategy and how they communicate it with their LPs?
VCs have a continuous dialogue with their LPs, (the people who give the money to the VCs). I guess they have all been on the phone, but reality is that VC is a long term business – and even if there is a short term issue, they expect the companies to work through it. They do have a responsibility to correctly assess the value of their investments, and with the current illiquid secondary market, they are sure to be asking VC for valuation justifications.
Q: Are startup valuations really correlated to stock market movements? Or would you say they rather correlated to the amount of capital raised from LPs?
Startup valuations are certainly not correlated to the stock market. They are correlated to the negotiating and persuasion capability of the CEO.
Q: For early-stage companies, do you think it makes sense to engage VCs and investors now in an effort to prepare for post-crisis investment?
It always makes sense to build a relationship – just remember that at the moment, people have additional stresses and issues that compete for their attention. So take care not to get a ‘No’.
Q: What are your thoughts on the industries that will become particularly interesting for venture investment after the COVID pandemic goes down and what industries are better to be avoided?
‘Distance’ related companies. Telehealthcare is coming out a winner, so is education at all levels. Logistics and delivery has shown itself to be very inefficient. Remote access systems for companies, anything that supports the home office environment. And let’s not forget online mental health – it is so important to so many.
Q: Any crowdfunding platforms in Luxembourg? Not aware of any…
Today, none, but VNX is on the way to this.
Q: What the business world will be in five-year term? And what businesses should do to get prepared?
I said I wouldn’t speculate but I try here. I don’t think it will be materially different to today – except I think we finally see the need for social security systems to protect the weak in every country, and this will mean that tax revenues need to increase. Cross border arrangements will see even more pressure. I also can imagine that government will look at supply chains for
critical material and try to keep these local, or at least regional. To be prepared, my simple message: make the best product that people want to buy and you will always win.
Q: What is your opinion about the social impact ventures?
For capital appreciation, no good. For social impact, really great and necessary – their returns should not be measured by unicorn valuations or massive exits – instead by other metrics, such as those we are increasingly quantifying and structuring. See the excellent work done at Luxembourg
Stock Exchange’s Green Bond program to establish a formal assessment methodology. The COVID will be a great leveler, and perhaps make us more aware as to how dependent we are on each other, on people who we do not treat that as well as the issues that the less fortunate need to overcome.
Q: The capitalism development model itself seems to be questioned by at least some governments. VC development model is based on it: potential high financial return. Shouldn’t we envisage some other kind of returns?
We need strong social systems, supported by taxes. It seems that a well managed, non corrupt capitalist system that we see in Europe today can deliver that.
Q: For companies invested by VC Funds – do you see any negative consequences for such companies applying and getting the state aid? Do you believe this could affect VCs management rights and future investment prospects?
I hope that state aid will be seen as a tool that people have used to get through the dip, since it was available. I expect businesses to be nimble and take the opportunities that come their way – so arguably I would be less likely to invest in someone who had not taken up the offer. I hope that the state aid packages are structured as a temporary support measure. I do not believe that the state (taxpayers) should participate in the long term in a startup growth. I would also not expect that future investment funds be used to repay old debt. That is a general opinion that has not changed.
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