Despite signs that things are increasingly getting better for segments like equity crowdfunding (here and here) and emerging markets like Italy have started to recover (here), a new real-time study on the topic posits that:
“The unique relational nature of entrepreneurial finance may make it highly susceptible to such a shock owing to the need for face-to-face interaction between investors and entrepreneurs.”Tweet
Indeed, authors Ross Brown, Augusto Rocha, and Marc Cowling point out that equity funding is strongly dependent on the need for close personal engagement between investors and entrepreneurs spanning from formal pitches to impromptu social meeting for coffees. In other words, intimate relationships are vital for equity investors.
Therefore, given the social distancing measures taken during the lockdown in the context of an evolving scenario being the virus here to stay,
“COVID-19 pandemic could fundamentally disrupt this form of finance.”
Data confirms that there has been a significant decrease in the levels of entrepreneurial finance deals in the first quarter of 2020 in the UK compared with the first quarter of 2019 to the first quarter of 2020 (31%).
The authors pointed out that “given the first quarter of the financial year is traditionally the strongest for equity deals, this would suggest further decreases throughout subsequent quarters in 2020 are highly likely.”
Indeed, “the figure for the first two months of the second quarter in 2020 (i.e. April and May) has witnessed a significant drop compared to the previous years.”
In trying to figure out how other economies have been affected, Ross and colleagues made a comparison with China, the first country to experience an outbreak of the pandemic.
Data reveals a massive drop in volumes and value. This led the researchers to conclude that the impact of the COVID-19 pandemic on the seed stage finance is insensible of geography.
However, since investors are getting more and more familiar with tools provided by platforms the negative effects of the pandemic could be mitigated. Provided that policy responses to support SME finances will be effective as “poorly designed policy instruments may accentuate (rather than reverse) the medium and longer-term effects of the current crisis.”
Find out more here.