The Impact Of The Coronavirus Pandemic On Early-Stage Investments

Due to the uncertainty that follows the Coronavirus pandemic, many startup founders worry that early-stage investments will be impossible to attract for the foreseeable future. I have a more optimistic view – investments will not freeze and investors are still willing to support startups that are not sensitive to an economic downturn. 

In this interview, Razvan Popa, Partner and Co-Head of Private Equity Sector at Kinstellar, and I discuss:

  1. the impact of the Coronavirus pandemic on Romanian startups;
  2. why startup founders shouldn’t worry regarding not being able to raise investments in the coming months;
  3. why digital companies are not the winners of this pandemic.

Listen to the interview below:


If you’d rather read, here’s the full transcript of the interview:

Razvan: Hello and Welcome to Kinstellar Podcast where we’re aiming to get insights concerning the current economic situation in the context of the Coronavirus pandemic. In particular, we’ll focus on private equity, venture capital, and corporations engaging in any activities. I am Razvan Popa, I’m co-heading the private equity sector in Kinstellar, and I’m here with Cristian Munteanu who’s leading Early Game Venture, a venture capital fund based in Romania.

Cristian, would you like to introduce yourself and the fund you’re representing?

Cristian: Sure. First of all, Razvan, thank you so much for the invitation. So my name is Cristian Munteanu, I’m the Managing Partner of Early Game Ventures, a 26 million EUR early-stage venture capital fund based in Bucharest. We invest in technology startups in Romania, innovative companies that are ambitious and address big markets. 

We officially started to invest out of this fund at the beginning of last year, so in January 2019, and we’ve already made 10 investments. As a fund, we are generalists, which means that we invest across the industries, but we stay away from healthcare, medical devices, biotech, new drugs, and so on.

In terms of commitments, we invest from as little as 50,000 EUR, up to 4.5 million EUR. Just for you to have an idea, each of the 10 companies we’ve invested in last year raised, on average, around 450,000 EUR each, and we led most of these rounds. In fact, there was just one transaction that we did not lead but followed. That’s us in a nutshell.  

How Early Game Ventures approaches early-stage investments

Razvan: Could you please let the audience know how did the current situation impact any of the transactions you were working on? 

Cristian: I should probably start by saying that since March last year, we’ve stopped looking at startups that were sensitive to an economic downturn. In many blog posts, published media articles, and interviews, I’ve expressed my concern about investing in the late stages of a boom. I was a pessimist at the point in the market cycle when being a pessimist was unfashionable, and an optimist looked best. 

But appearances aside, my common sense proved solid, and my dark expectations came to reality, unfortunately. The pandemic caused the boom period to end a little sooner than it should have, but much more abruptly, pushing the economy into recession. Again, as I said, we were prepared for this, for a downturn scenario. So the transactions we are working on are not affected by the current context. We are finalizing no less than four investments right now, as we speak, and we shall make them public soon. We did not renegotiate the evaluation, nor asked for additional protection – we’re trying to be very fair with the founders. So, from this perspective, we just proceeded as planned, simply because our strategy was very solid, sound and we were cautious. 

Razvan: That’s really impressive, and I’m happy for you and the strategy you chose. Obviously, as you said, last year was not very fashionable to talk about the crisis when everyone was looking at growth.

Cristian: No, it’s never fashionable to be a Prophet of Doom. 

Razvan: Yes, unless you’re Mister Doom – Dr. Doom, right? Coming back to Early Game Ventures, what about the portfolio companies you’ve already invested in last year? How are they performing under the circumstances? 

How Romanian startups are adapting to the new business context

Cristian: All companies are adapting to the new context. They’re cutting costs, producing marketing budgets trying to extend their runway and increase the chances of surviving the crisis. Because we’re just at the beginning of the crisis, and this is very important. We estimate that it will have a long trail, and it will last for several quarters. 

Our portfolio companies are doing exactly the same and we’re next to them, supporting them through difficult times, helping them to make the right decisions, and cut the costs they can afford to cut. But companies in our portfolio such as Bunnyshell or Druid, they’re even growing in the quarterly market share in these circumstances. They help companies move online and manage their cloud infrastructure.

Others, such as Adiem, Neobility, or RoboSelf, are in the pre-product stage, working in the lab to develop new technologies. So they’re not as affected by the crisis as they’re not commercializing anything yet, but they will be soon. And, in our opinion, all companies will be more or less affected by the economic downturn. So the prospects are less bright than they used to be two months ago, let’s say.

Early Game Ventures portfolio companies are relatively shielded from the economic downturn

Razvan: Absolutely. If you can disclose – have you invested any emergency funds into these businesses?

Cristian: No, or at least not yet simply because we reacted very fast to everything that happened, and we’ve shifted our focus from deal-making to helping our companies as soon as we’ve detected that there’s a problem in the market. And until now, we didn’t pour additional capital into our portfolio companies. But maybe we’ll do this. Not in the coming weeks or months, but probably towards the end of the year, we’ll have to do it. We are prepared, we have a lot of drab powder, so there is the capital, we don’t have a problem with this, let’s see if we’ll have to do it. 

Razvan: Thank you. In a way, you’ve kind of answered my question already, but do you want to comment a little bit more on whether this situation has impacted your investment strategy in any way?

Cristian: Yeah, when it comes to an economic downturn, early-stage VCs such as our fund are less affected in terms of revisited valuations because they’re not paying the premium that late-stage funds always have to pay. But early-stage VCs should worry about the business impact of a crisis on startups at the beginning of their life when they’re most sensitive to shrinking demand. This is why our portfolio is front and center these days, as I just said. 

Otherwise, we’re loyal to our long-term strategy – it was a very sound strategy, we were right from the very beginning. So we’re looking to invest in deep tech startups, not tech-enabled businesses, and this is a very important distinction we make when looking at startups. Staying true to your strategy means you’re able to say no to all distractions, to a lot of opportunities that may arise and defocus you from your main goal, and we’re quite good at saying no.

Razvan: Yes, that’s something that not all people or businesses are able to do. Focusing on your core business is probably the best answer you can give under any circumstances. 

Cristian: Indeed, yeah. 

In a crisis there are no winners, only survivors 

Razvan: Obviously, everyone is trying to find answers to all the questions around this situation and I’ve seen people saying that the digital industry will be one of the winners of this period. I would like to have your views and comments on this topic.

Cristian: Yeah, I’ve heard this idea repeated several times in the last few days. Maybe digital companies are less exposed to the crisis, less than restaurants, offline retailers, and consumer-facing businesses, but make no mistake – in a crisis, there are no winners, only survivors. 

All companies will suffer as the macroeconomy deteriorates. Unemployment and the decrease in consumption will have a negative impact on all companies. Indirectly, even on those that are B2B, tech startups as well. So also, for the time being, many businesses will move online, but how many will stay online once the stay-at-home period will end? For the time being, working from home is very productive, but it’s because people are forced to stay in their houses. I expect the productivity to decrease dramatically once people will be allowed to leave their homes and take long walks in the parks.

So, you see, it’s not as if digital companies, tech startups are in a safe harbor from the crisis – they are affected, they will be affected. We’ll all suffer because of this, it’s not a happy time for anyone, not even for those who see themselves, that perceive themselves as the winners of this crisis. There are no winners, and there will be no winners. 

Razvan: Yeah, thank you very much. Unfortunately, I agree with you that the net worth of the entire world is decreasing and the GDP is going down. It’s all a question of surviving unless, of course, you’re booming. We’re moving towards wrapping up this podcast – is there anything you’d like to send across as a message?

Cristian: A special message to the founders because I would like to lift their spirits up a bit, to cheer them up a bit in these gloomy times. The world is not going to stop, the investments are not going to freeze, at least not for a long time. For example, we are finalizing four investments, as I just told you the four investments we are currently involved in and ready to sign in the next few days. 

But we’re always open to discuss with founders who approach us. What we want to see from the founders is maturity and realism. They need to adapt their forecast and their capital to the actual market situation. They need to present their vision and gain investors’ trust. Trust is the keyword here.

Founders raising money will have difficult days ahead, but I’m sure we’ll be able to make it in the end. So it’s not all lost. Maybe some founders’ efforts should be put on hold or postponed a bit, probably until autumn, some won’t probably be forced to do that, but investments are going on. All you have to do is present a good deal to your investors. So I’m just trying to be positive and optimistic for all listeners and encourage them not to be scared and to keep working and to keep applying for fundraising. This is important.

Razvan: Thank you very much. I think this is a very optimistic and encouraging message. And very valuable, especially it coming from the Managing Partner of a venture capital that has money and willingness to invest in this period. This is good news from all perspectives, and thank you very much for this message and for the time you dedicated to this podcast.

Cristian: Thank you, Razvan and Kinstellar.

The bottom line is, investors will still be investing in startups during, and after this pandemic is over – it might just take them longer to commit to other startups who are not in their portfolio. No sectors are off-limits either, but startups who are more sensitive to economic downturns will have a harder time attracting early-stage investment.

To ensure they will be able to attract investments in the future, founders need to keep developing new ideas and seriously impress investors with their product and knowledge of the market.

Are you a startup who wants to reshape the tech industry? Let’s talk