Moreover all of the investors that took part in the Deloitte Scale-up Investor survey are still looking to invest in companies outside of their current portfolio.
Brussels, Belgium – 25 June 2020
Investors that have placed their trust in scale-ups have barely changed their investment strategies in light of COVID-19. Deloitte’s latest survey, supported by Scale-Ups.eu, on the impact of COVID-19 on scale-ups focuses on the investor perspective. In May this year, seven out of ten Belgian scale-ups stated they remain confident that their business will successfully navigate the COVID-19 pandemic. However, investors believe that they were slightly too optimistic. While companies have primarily focused on cost restructuring and augmenting their overall market-readiness, pivoting business models is not a course of action recommended by the investors.
Koen Vandaele, Deloitte Belgium Ecosystems & Alliances Leader: “Investors believe scale-ups were slightly too optimistic when surveyed; However seven out of ten are confident that their portfolio companies will come out strong and be able to continue or even accelerate their growth trajectory. This crisis has been especially challenging for scale-ups with a long R&D phase, resulting in delays and potential funding issues further down the line.”
Investment strategies remain unchanged
Due to investors' long-term thinking, most investors did not change course, however they do anticipate reduced or more realistic valuations.
All of the investors that took part in Deloitte’s survey are still investing in companies outside of their current portfolio. Fifty-eight percent do not aim to diversify the type of companies within their portfolio, yet a significant 42 percent plans to adjust their sector focus or even avoiding some (e.g. considering to step up investments in healthcare, e-commerce or gaming, whilst avoiding travel, retail, events and hospitality)
Levels of investment remain largely unchanged with only five percent decreasing the amount, 21 increasing it, and 74 percent making no changes. Eleven percent sped up at least one investment round, five percent cancelled one, and 21 percent put discussions on hold, while 63 percent noted no change. Seventy-one percent expect a delay in exit for some of their portfolio companies, as M&A transactions are often put on hold for a couple of months until the situation stabilizes. (see infographic)
Kristof Cox, Deloitte Director Scale-ups Ecosystem: “Many investors are not yet able to indicate what the impact of COVID-19 on their fund’s ROI will be in the long run, as it is simply too soon to tell. If a negative impact is expected, it is often due to slower returns as certain exits are expected to be delayed by a couple of months or even years.”
Avoiding business model pivots
There is clear consensus amongst investors that scale-ups should stay the course and not drastically pivot their business model. Although some have performed minor product adaptations, investors do not feel true business model pivots are a smart move to accommodate for the temporary COVID-19 crisis.
Anaïs De Boulle, Deloitte Senior Manager Scale-ups Ecosystem: “All of the interviewed investors are actively involved with their portfolio companies, closely monitoring their financial health, often by means of weekly cash flow planning reviews. Certain investors have provided bridge financing for a few of their scale-ups. They are primarily coaching their scale-ups in optimising their commercial strategy, business model, go-to-market, talent and some are even helping to set up KPI dashboards.”
Increase in digitisation, localisation & collaboration
An increase in digitisation and localisation (i.e. focus on regional markets) is to be expected. Bruno Vandegehuchte, Head of Investor Relationships Scale-Ups.eu: “New opportunities are already arising for scale-ups on a more local level as established companies face new supply chain challenges, which scale-ups have started to capitalise on. Tech scale-ups will need to accommodate such a trend and seize these opportunities to fuel their growth.”
Bruno Vandegehuchte: “Certain investors are already actively pursuing inter-portfolio collaborations, where scale-ups are able to strengthen each other with compatible capabilities, provide ‘in-fund’ expertise, and exchange best practices or even talent. Buy and build or add-on strategies will become even more prominent amongst investors—especially for private equity funds—and might impact the scale-up ecosystem.”
Long R&D phases can lead to funding issues
For scale-ups with a long R&D phase, the COVID-19 crisis can be especially challenging, resulting in delays and potential funding issues further down the line. Koen Vandaele: “The technology roadmap has been delayed for several companies, more specific R&D companies, often claiming delays of three to six months. MedTech and BioTech companies are impacted by FDA and EU regulators prioritising COVID-19 projects, and some are faced with a temporary suspension of clinical trials.”
About the survey
Deloitte & Scale-Ups.eu interviewed 19 investors and one funding agency to assess how their portfolios and investment strategies are impacted by and how they are responding to the COVID-19 pandemic. The interviewees primarily consist out of Belgian investors (13), while a minority of interviewees has a foreign-based headquarters (three in the UK, two in the Netherlands, one in the Czech Republic and one in Luxemburg). As a follow-up to this and the previous study, other key stakeholders within the scale-up ecosystem, such as corporate venturing companies, will be queried to gain a thorough understanding of all factors at play. For the full survey: click here.