indexindexauthorShakeel HashimIndex NewsletterNeed to dive deep into the financial movements that matter to tech? Get Shakeel Hashim's newsletter every Friday.f11fbe35a3
×

Get access to Protocol

I’ve already subscribed

Will be used in accordance with our Privacy Policy

Protocol Index: Startups better watch out for sharks

POP-UP REPORT

Good morning, and welcome to Protocol Index, your daily pop-up report about the financial movements that matter to tech during the COVID-19 crisis. Want Index in your inbox each morning? Subscribe here.

Today: Conditions look great for sharks to start sniffing at startups, banks take a look at what's happening to IT spending, and some advice for venture backed companies looking to apply for the paycheck protection program.

What Matters Today

  • Around 5 p.m. PDT: Samsung will report its earnings guidance for the last quarter. Memory chip sales are expected to have risen from WFH-demand, but weak smartphone sales mean analysts expect its profit to remain the same as a year ago.
  • Coming up this week: Tomorrow, euro area ministers will (virtually) meet to discuss a stimulus package; on Wednesday, the Fed will release meeting minutes from its interest rate decision; Thursday is expected to bring more terrible unemployment data; and Friday sees the release of inflation numbers.

Layoff Watch

Today's News

As of 4 a.m. PDT: Nasdaq Futures: 3.76% | Euro 600: 2.96% | Nikkei: 4.24% | Hang Seng: 2.21%

OPPORTUNITIES

THREATS

DEALS

Interview

A great time for sharks to come out to play

We've talked a lot about how this crash will affect startup fundraising, with a bunch of research and forecasts saying that it's not looking good. But what are things actually like on the ground? Spoiler: also not good.

Graham Gintz, a fundraising associate at Techstars' Social Impact program in Atlanta and founder of Knightley, told me that he's seeing angel investors fall into two camps.

  • "One side is completely business as usual," he said.
  • "The other side is: 'I had all my angel money tied up in the market and there's no way that I'm taking a loss to go place high risk bets.' So I think a large number of angels have benched themselves, some for a month, some for the rest of the year."

For those that are willing to fund, Gintz said the market's shifted in their favor.

  • "I think definitely investor-led terms is going to be the trend, and the number of companies that have really great leverage right now is really, really small," Gintz said.
  • That might bring out the worst in people. "I think it's gonna be really interesting to see across the industry as a whole how sharky investors want to get, because there's a lot of really good companies that are going to need capital — or die."

It's not all gloom though. Gintz said things might recover quicker than expected:

  • "California seems to be doing pretty okay [with the virus] … And because half the money in VC is coming from California, I think that [funding] may actually resume more quickly than one might expect."
  • For now, investors are branching out. Gintz said he'd spoken to one "well known fund" in New York, that typically only invests in the north-east because its thesis is "very relationship driven." Now, though, it's looking to expand to other regions: "It's effectively the same whether you're in the Lower East Side or down here in Atlanta."

Mostly, the mood seems to be one of figuring out how to survive.

  • "I've heard through other founders and other investors of board meetings where basically, the investors were like: 'Any acquisition offer you've ever gotten? Reach out,'" Gintz said.

Do you work at a startup trying to raise, or a fund figuring out what to do? Let me know what you're seeing: shakeel@protocol.com

Overheard

  • "Video game publishers have fared relatively well amid a downturn for the broader markets." — Piper Sandler says its group of video game stocks has increased 1.6% this year, compared to an 18% drop in the Nasdaq. SuperData research suggests there's been an uptick in gaming demand.
  • "For startups that have seen drastic reductions in revenues, two months of payroll may not be able to provide the runway needed … the loans may simply prolong the inevitable when they will need to go back to investors to raise more capital." — PitchBook VC Analyst Kyle Stanford doesn't think loans can solve every problem.
  • "I urge everyone who is running a venture backed company with a lot of money in the bank and limited COVID-19 impact to think twice about applying for PPP." — Union Square Ventures' Albert Wenger thinks startups should let the money go to mom-and-pop businesses instead. Bedrock founder Geoff Lewis, meanwhile, thinks many startups might find themselves ineligible.
  • "The large U.S. technology companies, such as Alphabet and Facebook, are currently demonstrating that they can play a positive role … which could possibly lead to incremental leniency in the ongoing FTC and DOJ antitrust and privacy investigations." — Goldman Sachs, citing a recent call with Andrew Lipman, a partner at law firm Morgan Lewis.
  • "In this kind of environment, we have halted proactive investment. We also will not be providing needless support to our portfolio companies." — An anonymous SoftBank executive, speaking to the Financial Times.

Everyone's Talking About

What's happening to IT budgets

Towards the end of last week, banks spent a lot of time talking to people about IT spending budgets. Here's what they had to say.

Deutsche Bank:

  • "Across all of our checks ... we'd estimate that 80%+ have already begun to cut and/or begin evaluating what projects will be deferred."
  • "One sign that this pending IT spending downturn is worse than normal is the number of customers citing plans to negotiate price discounts (of perhaps 10%) from their technology vendors by accelerating contract renewals (and in return perhaps adding another year to deals)."
  • "Hardware refresh cycles are getting extended and … back-office (ERP, HR, Financials) IT projects are getting put on hold." Oracle, SAP, and Workday are being hit hard, Deutsche said.

Morgan Stanley:

  • Citing its flash survey in late March, the bank found "52% [of respondents] had cut IT budgets, by an average of 2.6% – with Professional Services hit hardest (down 4.8%), followed by Software (down 3.6%), then Hardware (down 2.8%)."
  • "Collaboration Software, VPN/Remote Access and Desktop Virtualization see positive spending impacts."

Wedbush:

  • "We believe that enterprise hardware spend is falling … conversely, cloud demand (and the stress on cloud infrastructure) appears to only be increasing."
  • "We believe cloud adoption was already weighing considerably on spend for on-premise architecture before COVID-19 and that recent shifts may only accelerate enterprise's move towards the cloud."

Oppenheimer:

  • "Anecdotally, many customers have begun re-evaluating 2020 IT and advertising budgets."
  • The bank looked at IT companies' performance in past recessions to spot some trends. "IT spending during the prior two recessionary periods, 2001 and 2007-2009, was more affected than other areas of the global economy," it wrote.
  • "The 2007-09 data suggest the back office suppliers (i.e., ERP/Financials and IT-centric companies) held up best during periods of economic distress." Human capital management software suppliers, however, didn't do great.

Closing Bell

Quibi's splashy entrance into a world in turmoil

Two things happened on September 15, 2008. One: The artist Damien Hirst sold over $200 million worth of art in the most expensive single-artist auction ever. Two: Lehman Brothers collapsed. Looking back, the two were obviously linked, and there was a certain poetry in such an obvious signifier of the boom's peak coming on the same day as the start of the bust.

Flash forward 12 years, and I have this pet theory that Quibi — which launched yesterday — is tech's version of the Damien Hirst auction. Here we are, with an app that's raised $1.8 billion based almost entirely on its founders' names which is getting reviews that are … middling at best? I think we could look back on this as another high-water mark of decadence and questionable decisions that marked the end of an era. Hirst's art is nicer to look at, though.

Thoughts/feedback/tips? Email me — shakeel@protocol.com — or anonymously contact Protocol. And subscribe to get Index in your inbox each morning. Thanks for reading, see you tomorrow.

Recent Issues

The IPO reckoning

The year in tech deals

Startups for startups