The latest Market Pulse survey by Tesi, Business Finland Venture Capital and the Finnish Venture Capital Association shows that a smaller proportion of companies in VC & PE portfolios currently face immediate difficulties. “Now we should ensure that financing is sufficient also over a longer period of time,” says Matias Kaila, Tesi’s Director, Funds.
The data from the Market Pulse questionnaire now published was collected in May. There was no dramatic change in the situation of Finnish VC & PE investors’ portfolio companies compared to the previous survey (conducted in April). Nevertheless, Kaila points out that it seems reorganisation and restructuring measures have improved the liquidity outlook in many companies.
“A smaller proportion of companies than previously are facing an immediate liquidity crisis, which could indicate that the adjustment measures enacted have been adequate and the owners have been quick to react on the situation. The fact that short-term problems do not seem to have increased is already a positive sign. There are surely difficulties ahead, but adequate cash reserves will allow companies to plan over a longer term,” says Kaila.
An average 31% of companies across the VC & PE industry still only have liquidity reserves for less than six months. Kaila estimates that those companies in difficulty before COVID-19 lockdown measures are seeing the greatest problems now as well. Liquidity outlook has improved most in companies in a more mature development stage, which is natural due to their wider access to different financing sources and ability to adjust their operations.
Building investor relationships by video call?
Kaila points out that the companies coping best have business models based on or supporting new technology, and customer relationships that generate recurring revenue. These companies are also, in general, adequately financed.
“It’s important to safeguard the follow-on financing of these companies in case the crisis stretches over a year or two and they need more financing, in addition to that provided by their present owners,” says Kaila.
Investors’ responses to the survey indicate that particularly startups (14%) and other early-stage companies could encounter difficulties in obtaining follow-on financing from external sources over the next year. Already some 10% of all portfolio companies are facing this uncertainty.
“Companies have managed to raise funding in recent months, but many of the negotiations started before COVID-19 lockdown measures. It remains to be seen whether borders will re-open and whether negotiations with international investors can be conducted via video calls if face-to-face meetings are not an option. In theory, it’s possible, but meetings and events have traditionally been crucial to creating new investor relationships,” comments Kaila.
Will Finland remain an attractive market?
Kaila points out that the economic crisis will hit players in different sectors at different times. The crisis will also have knock-on effects producing delayed impacts. Tesi will cooperate with companies and their owners to prepare for later impacts of the crisis and changes in investors’ behaviour.
“We’ve noticed some signs that deeptech companies, in particular, may in future find it more difficult to obtain financing, because they rely more on large corporations for financing than on funds with strategies dedicated to cover the segments,” Kaila says.
The world will not run out of money. COVID-19 may well, however, impact its geographical movement and investors’ appetite.
“The activity level of international investors with an established pattern of investing in Finland will likely remain unchanged due to established relationships in the region. These ‘usual suspects’ and Finnish investors, however, form a minority portion of the investment volumes channelled into Finnish early stage companies. Vast majority of investors have made only one single investment in Finland, and there are no guarantees of their behaviour,” says Kaila.
Finnish angel investors still plan to invest
Tesi has collaborated with the Finnish Business Angels Network (FiBAN) in charting the situation more broadly by utilising FiBAN’s member survey.
FiBAN’s investor survey shows that Finnish angel investors have not stopped investing. Their deal volumes will likely be smaller than the two previous years, but this is mainly due to the record activity of angel investors in 2018 and 2019.
“COVID-19 caused deal flows in angel investing to falter in March, but it recovered in April. After the initial shock, angel financing discussions seem to be continuing unchanged,” comments Kaila.
Market Pulse
What it is: A survey by Tesi, Business Finland Venture Capital and the Finnish Venture Capital Association conducted between 15th and 22nd May 2020. A corresponding survey was arranged for the first time in April.
Respondents: Altogether 24 venture capital/private equity investors that have a total of 306 Finnish portfolio companies answered the questionnaire. The company base fairly represents Finnish venture capital and private equity backed companies.
More to read: Market Pulse results (pdf) The results of the earlier survey (pdf).
Matias Kaila
Who he is: Director, Funds, at Tesi.
Education: MSc (Econ), Turku School of Economics.
Earlier work experience: Danske Bank, Director, Leveraged Finance in Finland; Eläke-Tapiola (now Elo) Head of Private Equity and Debt.