Short and Long Term Implications of Covid on Blockchain Investing
SHORT AND LONG TERM IMPLICATIONS OF COVID ON BLOCKCHAIN INVESTING
THe VIEW IN APRIL 2020
Dear fellow blockchain investors and friends.
We are now a few weeks into the Global Virus Crisis with the situation evolving quickly and high levels of uncertainty. At Fifth Era we manage the world’s leading blockchain venture fund of funds and we have recently finished talking to the General Partners (GPs) of each of the pure-play blockchain venture funds we are invested in, as well as many of their portfolio company CEOs, to learn how they are impacted and responding in the near and medium term.
Broadly, they are in relatively strong shape and reacting appropriately to ensure preservation of value and to be positioned to take advantage of opportunities going forward. We have also heard their respective views on what this current pandemic might mean for the longer term outlook for blockchain technologies. Here there is quite a lot of optimism. We are planning a webinar on this topic that you will be able to register for at our Blockchain Coinvestors site, but we are sharing the highlights with you below:
Near and Medium Term Responses to the Crisis
Our funds are mostly managed by experienced venture GPs who have been through crises and cycles before, and recall from 2008 (and in some cases 2001) the best practices that need to be implemented. So across the board, they are partnering with their portfolio company leaders to ensure they are well positioned.
Taking swift action to cut costs and reduce burn rates — earlier decisions are rarely regretted.
Variabilizing as much cost as possible with immediate effect, and shifting to equity based compensation where it makes sense.
Negotiating now with vendors, landlords, and so on to see what can be reduced or deferred.
Slowing down payables, including maximizing payment schedules against terms and conditions.
Focusing on revenue generation, including reordering priorities and re-planning the road-map to make sure the top line is emphasized.
Moving quickly to get to the head of the queue for government support, non-dilutive funding such as defense grants, and so on.
Deferring any discretionary development road-map modules that are off the critical path.
Strengthening the balance sheet including closing any outstanding commitments and exploring venture debt and lines of credit.
This list is illustrative, not exhaustive, but all of our GPs have made sure their CEOs are reporting progress against lists such as this.
Positive Tailwinds for Blockchain longer term
Here, the feedback is quite optimistic. The biggest barriers for transitioning to a fully digital world that embraces native digital monies, assets, and new technologies like distributed ledger, have been behavioral. In a matter of weeks, the world has been forced to implement technologies that will greatly accelerate the adoption curves where blockchain is involved.
Some industries that have been embracing digital distributed technologies are relative beneficiaries of this crisis. Global technology enabled entertainment, education, electronic commerce, and digital payments are obvious examples.
Companies that have low fixed costs such as software businesses are relatively well positioned — many, but not all, blockchain businesses fall into this category.
Blockchain markets have been volatile, which has been good for trading-related businesses. We have seen large platforms announce record volume and profits.
Digital payments are accelerating, with China announcing record digital payment flows, including over native digital money platforms like Alipay and Wepay.
Much of the inherent skepticism about blockchain technologies is going away fast. As an example, the realization that the US has no effective approach for getting trillions of dollars of support to its 330 million people without using checks and paper money, led Congress to try and add a digital wallet/digital money initiative to the recent crisis support bill. While it was struck out, there is now a much clearer appreciation of what blockchain can do for digital payments among our lawmakers.
The same is true along the global supply chain where the provenance of everything from food to personal protection equipment such as masks has become paramount as people become concerned about where and how items have come to them.
These are again examples that we are hearing our investors and CEO’s talking about as they look beyond the daily crisis.
Expectations for Investing
Here there is a split between short term and long term investors:
Short term traders and speculators welcome volatility so long as they are not over leveraged, or on the wrong side of trades. This is not a world we occupy, but clearly many crypto traders are very active right now and taking advantage of other people’s distress.
For long term investors, the sentiments are as follows:
There is anticipation of a significant venture funding slowdown as we saw in 2008 and post the dotcom crash.
Due to lockdowns, GPs are not able to meet face to face with entrepreneurs. As such, it has become challenging to invest in any new projects, and the best GPs are using this time to work with — and strengthen — their best portfolio companies.
Term sheets are being re-negotiated and valuations have already come down.
Given the above, existing investors are a firm’s biggest ally. They are able to act fast and provide short-term financing needs, at terms agreeable to both parties. Many CEOs are trying to complete add-on financing from their current investor bases.
We expect a shakeout in Blockchain — a topic we cover in our recent book Blockchain Competitive Advantage where we talk about how blockchain is entering its early competitive phase. The crisis is just accelerating this. The strongest companies in each use case will see less competition as others fail.
The consensus of our GPs and portfolio company leaders is that this crisis will accelerate our global transition to a digital world, and that this in turn makes it a good time to invest behind the best long term disruptive companies leveraging blockchain and the investors that back them.
We thank you once again for your support, and we hope that in this challenging time you and your family and loved ones are staying safe and healthy.
Best wishes,
Alison Davis
Matthew C. Le Merle
General Partners