Coronavirus, a new challenge for Venture Capital

16th April 2020  

by Gaia Giorgio Fedi

As market panic was starting to rise, Sequoia Capital called the coronavirus pandemic “the Black swan of 2020”, and warned founders and CEOs  they should brace themselves “for turbulence and have a prepared mindset for the scenarios that may play out.”

Although the advice from the leading Silicon Valley VC firm is surely forward-thinking, the definition of the new Coronavirus as a black swan might not be perfectly fitting for the situation. A black swan is an unexpected event that produces colossal effects on economies and markets. But SARS-CoV-2, albeit certainly capable of wreaking havoc on the global economy, was not so unpredictable: after a series of outbreaks in recent years (Sars, Mers and Ebola), health experts had been alerting states about a possible pandemic, particularly from bat coronaviruses, and complaining about a systemic lack of preparedness.

States have failed in addressing these concerns. Health systems are collapsing under the coronavirus emergency, intensive care units are overwhelmed and many countries report a lack of life saving devices, such as ventilators, and of personal protective gear for doctors and nurses. Even after seeing the devastating effects of the outbreak in China, governments had been living for several weeks in a state of denial that prevented them from preparing the necessary measures to take on the crisis in a timely manner.

Venture Capital has always been, by its nature, at the forefront in looking for innovative solutions to problems, often filling the gap for governments' passive attitude in woking things out. In times like this, when the whole planet is struggling to fight the new Coronavirus pandemic, innovative companies - and funds that support them - should not just brace for cash squeeze and falling margins, but also try to play a role in solving the crisis.

Public institutions are already offering fast track funding for companies working on anti-Covid19 solutions. In March, the European Commission called startups with technologies and innovations that could help in treating, testing, monitoring or other aspects of the Coronavirus outbreak to apply urgently for a round of funding from the European Innovation Council (Eic). The Eic is already supporting several companies with Coronavirus relevant innovations, that include the EpiShuttle project for specialised isolation units and the m-TAP project for filtration technology.

Other players in the VC and entrepreneurial world are also playing their part. Bill & Melinda Gates Foundation announced with Wellcome and Mastercard a $125 million effort in seed funding to speed up potential responses to the health crisis with the COVID-19 Therapeutics Accelerator. The accelerator, explains a press release, “will play a catalytic role by accelerating and evaluating new and repurposed drugs and biologics to treat patients with COVID-19 in the immediate term, and other viral pathogens in the longer-term.”

L.A. Venture Capital firm MarsBio also posted a call for proposals to those working on solutions to tackle the Coronavirus crisis, particularly on vaccines development, prevention, public safety and operational response. The aim is to vet those ideas and help them secure funding. The firm has already put two companies in touch, Curative and Korvalabs, to speed up the production of testing kits for Coronavirus, and helped the former raise $800,000.

On the company side, there are some startups that have the know-how to respond to this crisis in a constructive way. For example, Biofourmis, a Boston-based startup specialised in AI-powered health analytics solutions, responded to a call by professors and clinicians from the University of Hong Kong to develop sensor-based armbands to detect early infection symptoms. Another example is Celularity, a clinical-stage cell therapeutics company started in 2017, that is seeking for regulatory permission to test a cancer drug as a treatment for Covid-19.

Unsurprisingly, the pandemic bolstered the interest for startups working on relevant fields: in early March Kinnos, a New York-based startup known for pioneering colourised disinfection products aimed at preventing infections in hospital, raised a $6 million investment round. And telemedicine startups in the US, like 98point6 and Amwell, are experiencing a surge in demand. This means that the need for solutions can obviously represent an opportunity for VC funds (and for startups that are active in the right sectors).

On the downside, these are hard times for VC firms and for startups, with plummeting valuations and zero demand for goods and services that were popular only a few weeks ago. Startups, that in most cases are not profitable, rely only on the liquidity provided by financing rounds, but fundraising can be very difficult when markets are in panic and investors have lost confidence. Still, these difficulties do not justify unethical behaviours: Matt Clifford, cofounder of company builder Entrepreneur First, denounced  in an op-ed on Sifted that, even if “signed term sheets are usually sacrosanct in venture”, he's seen a minority of VC firms “try to halve valuations on the day of completion or even try to ghost founders completely, as though the deal had never existed”.

This is a very shortsighted and unfair behaviour, in a moment when everyone should rather be brave and play their part to navigate through this crisis. As UN chief António Guterres said, "this is a time for prudence, not panic. Science, not stigma. Facts, not fear."