You’ve streamed dozens of movies and TV shows on various platforms. You’re using Door Dash and Uber Eats to get food delivered to your home. You (a) know what Zoom is, (b) used it a million times in the last three weeks, and (c) are starting to hate it.
We’re exploring the world and connecting with friends, family and coworkers via technology more than ever amid the coronavirus pandemic, and so there may be the perception that these are boom times for tech companies.
For some, sure. But for the greater ecosystem of tech startups, of which Boulder County is a vital part, times are as uncertain as they are for other industries.
According to Boulder County venture capitalists and tech accelerators, funds available to tech startups in the U.S. will be limited over the next few months, or longer, as investors wait out the economic uncertainty.
“This is the roughest environment I’ve seen in my 25 years of working in finance,” says Jason Searfoss, chief financial officer of Boomtown, an accelerator in Boulder. “My hope is that the economic situation takes the shape of a V, where we have a steep decline and … come out of it with a significant and positively sloped bounce on the other side.”
Many tech investors, particularly those with larger portfolios, have turned their focus to their existing investments, hoping to protect and nurture those companies, instead of risking funds on new startups.
“On balance it’s tough times because those angel investors, those people with money, are looking at their mutual fund balance and saying, ‘Woah, I just lost a lot of money,’” says David Brown, founder of Techstars, a Boulder accelerator.
Data from Startup Genome indicates as much 50% of tech funding has contracted in China since the start of the pandemic. Though it’s not an apples-to-oranges comparison of how funding will be affected in the U.S., those in the industry are preparing for the impacts of the downturn.
“Companies raising in the near term will likely see two key negative impacts for their funding plans. First, less investors at play, as a number have pulled back from the market,” says Tom Humphrey, a partner at Boulder’s Access Ventures, a venture capital firm. “Second, companies will also face an easing off on valuations as their market conditions and forecasts worsen.”
Too, for accelerators like Boomtown, the stay-at-home orders have limited collaborations between entrepreneurs. Whereas in the past, Boomtown paired different startup teams with one another in 12-week cohorts based on complementary skills, now everything’s moved online.
“These creative collisions, as we call them, happen very naturally when teams are in a confined space,” Searfoss says. “Those conversations happen very naturally; you can spin to the side or turn around and ask somebody something. Or you can overhear a conversation at the water cooler. Put smart people in the same room and good things happen.”
Galvanize, a co-working space in Boulder that caters to people in tech and offers ongoing education classes, has switched to an online model temporarily, offering some free classes to those interested in learning coding, software engineering and more.
“Whether people are facing unemployment right now, or are re-evaluating their career or personal goals, we see the demand for upskilling and reskilling, and for Galvanize’s immersive programming, to continue to grow,” a Galvanize spokesperson said in an email.
Some investment firms/accelerators say this might change the types of companies they look to invest in —certainly anything that improves telecommunication or health care work is getting extra attention, for instance, while other companies, like those in travel or that rely on in-person contact, might get less attention.
But there is a silver lining in all this: Recessions are a great time to start a business. The list of tech companies that launched during the dot-com bubble burst and the 2008 recession reads like a startup hall of fame: Facebook, Uber, Pinterest, Venmo and Dropbox to name a few.
“Every investor will tell you that a downturn is a really good time to be starting or growing a business, and that competition for talent tends to be less, there tends to be fewer competitors in the market, marketing dollars go farther,” says Seth Levine, managing director at Boulder VC firm Foundry Group.
Part of that is the belief that the economy will turn around. Searfoss from Boomtown is “cautiously optimistic” the rebound will improve as quickly as it declined.
“Right now, even when you’re locked indoors, prepare for when we come out of this thing,” he says. “When we do, the economy is going to take off like a rocketship.”
And different from previous recessions is the abundance of “dry powder” — cash reserves kept on hand by a VC firm — that wasn’t available in the Great Recession, fueled by years of fundraising, Humphrey, from Access Ventures, says.
As such, “Venture is less susceptible to the swings and emotions of the public markets,” he says.
So, what should tech entrepreneurs be doing right now?
“It’s a good time to hunker down and to build a product,” says Searfoss. “The challenge is that we teach our teams not just to build a product. Don’t go develop some elegant product unless you have a firm understanding and grasp of the problem that you’re solving with that product. To understand and really embrace the problem you have to have a significant number of customers. Find out what those problems really are, and dive deep into those problems. Find out if your future customers are going to be willing to pay for a solution to these problems.”
Levine, from the Foundry Group, says wait, if you can, and be prepared for the economy to turn around and learn the lessons this pandemic has taught us.
“Right now is not a great time to look for funding,” Levine says. “People are in crisis mode. But once we’re past that, I would encourage them to go and pursue their ideas. I think they need to have a really good pitch, and just understanding both themselves and potential investors for why their business can be successful through a downturn and particularly a downturn form a virus. People have a lot of things on their mind about how this might affect business for a year or years. You have to acknowledge that as part of the pitch. … Don’t ignore it.”