By Kara Carlson
Austin American-Statesman
WWR Article Summary (tl;dr) Many startups and investors who depend on venture capital are looking at a shaky future. As Kara Carlson reports, the coronavirus pandemic is making the current market and company futures harder to predict.
Austin
For a startup like Riders Share, moving its headquarter to Austin and raising funding would be typically be cause for celebration.
But the current business environment is anything but typical, due to the coronavirus pandemic.
Riders Share co-founder and CEO Guillermo Cornejo now finds himself navigates the uncharted waters the outbreak has brought to the venture capital market and startup community.
Cornejo said the startup — which operates a platform for motorcycle rentals, similar to Airbnb or Turo — was midway through raising a $2.2 million round of funding to help the company grow when the market crashed. Then sales plummeted about 90 percent in a single week.
Now the startup –which moved from Los Angeles just weeks ago — is scaling back to weather the storm.
“We were expecting to grow to $10 million this year. And we were on track, but then this happened and everything went downhill.” Cornejo said.
That story would sound familiar to a number of Austin startups and other companies that were looking to raise venture funding this year. It’s in stark contrast to 2019, when Austin-area companies combined to raise $1.73 billion, the largest total since the height of the dot-com boom era in 2000, according to PricewaterhouseCoopers and CB Insights.
Now the Austin venture capital scene and the companies and investors that rely on it face much more uncertain future as the coronavirus pandemic makes the current market and company futures harder to predict.
“Right now people are still trying to figure it out,” said Thomas Ball, co-founder of Austin based VC firm Next Coast Ventures.
‘Flying blind’
In many ways the economic shutdown and remote working environment that has come to many sectors is unprecedented, Ball said.
“The group of venture investors in town are old enough where we went through the 2008 financial crisis. And some of us are old enough to have gone through the internet bubble burst.” Ball said. “I don’t think it’s the first crisis we’ve experienced, but it’s certainly the first global health crisis we’ve experienced that kind of shut down the world. Most people are trying to figure it out on the investing side and the entrepreneur side.”
Chris Pacitti, founder and partner of Austin-based Elsewhere Partners, said he wouldn’t be surprised if 2020 sees a 50% or greater reduction in funding volume compared to 2019.
“I’d say there’s going to be a major hit, not just in Austin, but I think in the (San Francisco) Bay Area and other tech hubs,” Pacitti said.
The market in many is “flying blind” on the potential macro economic impact the stay at home orders could bring and how long they might last, Pacitti said. It also means major sectors including hospitality, retail, travel, transportation, restaurants and gas are being directly impacted.
“I would guess we’re already in a recession. The question is, how deep and how dark is that recession going to get?” Pacitti said.
“We’re kind of frozen right now. We’re all in this at-home lockdown mode,” Pacitti said. “While we’re still talking to companies and having multiple calls a week with various companies, it’s really hard to write a seven- to eight-figure investment into a company when you haven’t met management and haven’t spent time getting to know them.”
Ball also predicted the Austin venture capital market will take a dip the next quarter or two as entrepreneurs and venture capitalists wait for things to normalize.
“The priorities right now are those in your portfolio and making sure they get through it, and they survive, because it would be a shame for all the hard work that’s been put into those deals for them not to survive,” Ball said.
The next priority would be companies that have existing relationships with a VC firm, he said.
“I think every venture investor’s really less likely to invest in brand-new relationships until all this dust settles, and who knows when this stuff is gonna settle,” Ball said.
Even some of Austin’s more successful companies have taken a hit and have been faced with layoffs and pay reductions. Accelerator and Incubator Capital Factory shifted services to virtual platforms and furloughed about half its employees, and online shipping company uShip laid off 65 employees, or more than a third of its workforce.
Austin startup Rigup, which makes an online platform that connects oil and gas companies and service companies, laid off about a quarter of its 300 employees in March according to Austin Inno. The company told Inno the layoffs were necessary because of economic hits to oil and gas and the impact of the coronavirus.
Rigup stunned the local startup community in October when it announced it had raised a $300 million round and raised its valuation to $1.9 billion. It added more funding in March, totaling $28.7 million, but just days later reported the layoffs.
Still, Ball said he is optimistic that the companies and investors that he’s spoken to are finding ways to adjust.
He said while the adjustment is challenging for companies of any size, smaller companies might be in a better position for the time being, as they have less of a built-in culture, less need for coordination and lower operating costs.
Finding ways to adapt
Cornejo, the Riders Share CEO, said his company is looking at ways to adapt. The company, which has a team of five currently, will likely add only one new employee instead of a planned five in the near future, he said. It’s also cutting projected advertising spending and holding off on office space since everyone is working from home for now.
Riders Share is also tweaking its business model. Listings on the platform are usually filled with higher-end bikes like Harley-Davidson or BMW. Now the company is looking to add more large scooters that require motorcycle licenses and can be driven on the highway.
Cornejo said the scooters would give food delivery drivers a transportation option at a lower price than a car, something he is hoping will help attract customers.
“If we’re successful in food deliveries we’ll continue with hiring, but honestly I’m not very optimistic,” he said.
The transition has been less drastic for Austin-based Osano, which makes data-monitoring software.
The company has been remote since it launched, which CEO and founder Arlo Gilbert said has turned from a concern for investors into relief as other companies scramble to set up virtual meeting systems. It also raised a $5.4 million round in December, which Gilbert said will give it the runway needed to ride out the the storm.
Still, the company is scaling back some more speculative plans and focusing on revenue drivers, Gilbert said.
“I think the biggest fear that I probably most folks and startup land have are, how is this major economic change going to affect things?” Gilbert said. “I think that’s the thing that keeps most CEOs up at night right now in startup world is that we just don’t know what the domino effect will look like. We don’t know who else will go out of business, what other industries will be majorly impacted.”
Austin-based software company Kronologic also raised a funding round just months ago. Co-founder and CEO Trey Allison said the company, which makes meeting-scheduling software, is better positioned than most because their product is in demand, especially as more meetings go virtual.
The company usually works with enterprise companies like Dell and Cisco, but now may offer products and pricing aimed at smaller companies.
“It doesn’t make sense to for us to be to be firm on pricing when we know we can help companies and it will all be stronger in the future with with a more vibrant or robust ecosystem,” Allison said.
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While the company is well-funded for now, Allison said it’s unclear if even 2021 will be as strong as the 2019 venture market or what raising funds will look like.
“The venture market does not know what the price of a company a share of a company like mine looks like. It’s very volatile, as is the broader, publicly traded market, and nobody really knows what the price of corporate equities are big and small,” Allison said. “There’s a ton of uncertainty. I assume that venture markets won’t be the same.”
‘This is challenging’
While all the uncertainty swirls, Pacitti said, many VC investors are taking a wait and watch approach.
“As we get better visibility investors will start to lean back in but, this is challenging,” Pacitti said. “We value companies currently on historical growth, and on future growth, As we look at 2020 forecasts and 2021 forecasts, it’s hard to know what’s realistic, relative to future growth, and how to value these companies.”
Regardless, the VC market is not shutting down, Ball said.
Many VC firms look long-term and raise funds that last 10 years or more, Ball said, and firms are still talking with companies.
Even amid the downturn, Ball said, successful companies could be born.
“From a business perspective, great companies are created in the downturn,” Ball said. “It forces people to focus on what’s important in their business.”
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Distributed by Tribune Content Agency, LLC.
