'It's like they are trying to f--k us': Founders say investors are using the coronavirus to renege on term sheets

Flickr/nickwebb

• Startups face going bust if the coronavirus induces a global recession.
• Founders and venture capitalists say unscrupulous investors are taking advantage of the uncertainty to renege on deals, adding to their current stresses.
• One founder relayed how their investor would only provide further vital funding at a lower valuation, known as a down round.
• But some investors note that VCs themselves must answer to their own investors, and must become more judicious about investing as the market turns.
• Click here for more BI Prime stories.

Startup investors are in the spotlight for how they behave during the coronavirus outbreak, with founders and peer investors complaining of renegotiated terms and withdrawn term sheets.

Startups in the US, Europe, and Asia face global recession thanks to the pandemic, and investors have warned that many could go bust.

As founders face huge pressure on their businesses, some are finding their backers won't provide the cash they need to survive, or only on newly onerous terms.

One European health tech founder, who spoke to Business Insider on condition of anonymity, said investors would only provide more cash at a lower valuation, known as a down-round.

"Venture capitalists see this moment as an opportunity, whereas for founders it's something to survive," the person said.

The founder compared venture capitalists' behavior to scalpers selling hand sanitizers "for $20 a bottle on eBay."

"Valuation discussions have been ridiculous, it's like they are trying to f--- us," they added.

One Europe-based VC reportedly told a founder that the global pandemic was "the best thing that happened to our business."

Matt Clifford, a cofounder of startup builder Entrepreneur First, was the first to publicly highlight what he described as "horribly exploitative" behavior by some venture capitalists in private, though he declined to name particular firms.

He wrote on Twitter: "Several examples but worst so far is calling a founder to say they're halving the valuation of a signed term sheet... 72 hours after full form legal docs were meant to be signed."

Some investors say it is natural for funding behaviour to change. The past few years have seen record amounts of funding raised by venture capital funds, making capital easier to come by for startups. The competition to deploy funds inevitably led to higher valuations for the buzziest startups. Those who benefitted previously should accept the way the market works, according to one Europe-based VC.

"It's like buying a house," they said. "If market conditions change so that the property's value is lower, then of course you want to pay less. We've been in an up market so naturally, people want more money but now they have to accept the opposite is true."

Paris-based investor Michael Jackson added that venture capitalists had to answer to their own investors, known as limited partners.

"The fact is VC behaviour is often driven by LP behaviour," he said. "Of course there are some VCs acting unscrupulously, but many of the current funding issues come from the top down and it's natural that as money becomes scarcer some funds and businesses will die."

Brian Caulfield, venture partner at Draper Esprit, wrote in a Medium blog on the issue that venture capitalists themselves don't always have immediate access to their fund while making investments, instead relying on LPs to supply cash as needed. If LPs themselves become strapped during a recession, the VCs won't have funds to invest.

He wrote: "How do we get out of this vicious cycle? It's simple. The brave investors who keep on investing (albeit at a slower pace) end up investing in some great companies at attractive valuations.

"As the world returns to normal and those businesses scale rapidly, VC returns improve greatly, and the asset class starts to look very attractive again."

Get the latest coronavirus news and updates on how COVID-19 impacts our daily lives and businesses.

Hearing about some horribly exploitative behaviour from VCs in the current environment. By the time this is through we're going to have a much longer list of people we can't recommend our founders work with...

- Matt Clifford (@matthewclifford) March 18, 2020

NOW WATCH: Why bidets are better than buying countless rolls of toilet paper