OLNS #5 – Venture Financings in the Wake of the Black Swan

Headed into 2020, start-ups accustomed to easy venture capital ("VC") dollars already faced leaner times, with VC funding having already cooled in Q4/2019. And then along came COVID-19...When you consider the shock waves this pandemic sent around the globe, how it sent the capital markets into chaos and affected both the demand as well as the supply side of almost every industry in every major economy around the globe, the current situation looks like a "perfect storm".

Sure, many iconic start-ups such as AirBnB, Instagram, WhatsApp, Stripe and Square were founded in the midst of or the aftermath of the Global Financial Crisis of 2008 and 2009 and other tech companies such as IBM, Apple and Microsoft re-invented themselves in down markets. But the truth is, there is little comfort in these stories as we often suffer from what behavioral economist call "survivorship bias", that is, we see only the survivors and ignore the faceless masses of those who were not so lucky. Thus, all market participants, and especially entrepreneurs, need to be prepared for a softening in venture financing and make plans to weather the storm. 

In this guide, we want to share some of our observations on the most recent developments and give practical guidance for fundraising in (historically) uncertain times. We will first provide a brief overview of the current fundraising environment, and then highlight likely changes in deal terms and structural elements of financings that both entrepreneurs and (existing) investors will have to get their heads around. We will also take a brief trip down memory lane to see what we can learn from the lessons of the last two tech crashes.

In preparing OLNS#5, our international and cross-functional Orrick team again drew on experience representing more than 2,700 tech companies globally, leading venture and private equity investors as well as many of the world’s leading technology companies. Founded in the Bay Area, Orrick is one of the world’s leading technology law firms and ranks #1 for European venture capital transactions (PitchBook, Q4 2019 – 16 consecutive quarters).

You can find an overview of our German Technology Transactions practice, including recent transactions and further publications, here.