Why do VCs continue investing during a recession?
VC Strategies
It's important to note that while VC investments during a recession can be advantageous, they also come with increased risk due to the challenging and uncertain economic conditions. Not all VC firms will follow the same strategy, and their investment decisions will depend on their risk appetite, investment thesis, and market outlook.
VC firms may continue to invest during a recession for several reasons:
More ROI
Since VC investments are typically made with a long-term perspective in mind, economic downturn at a given moment might be seen as a temporary setback. Investments made during this time could bring substantial returns once the economy recovers.
More Innovation
Recessions can create a better environment for innovation. Challenges become more apparent during economic downturns and startups often emerge with new ideas and solutions to address. VC firms try to identify those potential for groundbreaking ideas, especially the ones to disrupt industries. During economic downturns, talented individuals might be more willing to join startups. VC-backed startups can attract skilled employees.
More Reasonable Market
Lower valuations become a strong incentive for VCs. During a recession, startup valuations tend to be more reasonable. VC firms can invest in promising companies at a lower cost, potentially leading to higher returns when the market comes back.
More Diversification
Investing during a recession allows VCs to diversify their portfolio further. This in turn reduces their risk. Some VC firms might view a recession as an opportunity to consolidate their market position or acquire promising startups at a lower cost.
More Support for Existing Portfolio
VC firms may continue to invest in their existing portfolio companies during a recession which can also be seen as a strategic move to position those companies for growth once the recession ends.