COVID-19 Deal Risk Insights

Some of the deal risk insights our team’s learned from working in the deal automations space during COVID-19. Many of these are commonly known, our team has just spent a lot of time reflecting on these items and how our industry’s changing.

Research and development pace has slowed

Many startups we work with are founded out of incubators, economic development centres, and labs. When they’ve reached a certain stage, they make their way into an accelerator to scale and then they’re off to renting office space.

This is the typical path we see with a lot of the startups in our network, us included.

Once COVID hit, a lot of these resources had to come to a halt, and some of them even closed down. Incubators that gave companies access to communal networking opportunities, labs that gave access to essential technical equipment, and accelerators that gave companies their office space - most of these were taken away from ventures and as a result, we’ve noticed that a lot of R&D has slowed.

When it comes to dealmaking, we think that the lack of resources that ventures once relied on so heavily has had a pretty serious impact on deal volume and deal size. We’ve heard from a number of companies that COVID’s affected their deals in four ways: 1) Volume of deals; 2) Deal size; 3) Deal standstill; 4) Deal flops.

To note a few examples, we’ve heard from companies that their negotiations pre-COVID had either been paused, reduced in scope and $, or straight up just called off based on uncertainty and potential force majeure. We’ve also heard from folks whose deals timelines had to be realigned based on their lack of access to proper resources on invention disclosures, patent filings, prototyping tools and support.

And it goes without saying that times are inevitably going to be tough financially when you need to realign your deals timeline.

Lack of productivity has taken a hit on deal-making

We’ve all heard of “Zoom fatigue” and the trials and tribulations associated with remote work and working from home. While it certainly was a struggle for most, it’s probably safe to say that most of us are comfortable in our newfound work environments and have surpassed those initial hurdles.

In our own experience, we know that many day-to-day negotiations are already handled remotely, typically over phone, Zoom, or email. Running almost 4 months into isolated work, we’re comfortable in saying that our negotiations processes haven’t changed. But where we’ve certainly felt the pain, as well as where the companies have, is productivity levels associated with deals.

Because of things like Zoom fatigue and the other inconveniences associated with remote work/WFH, 1:1 work guidance is harder to come by, deadlines feel less pressured, mistakes are more likely to happen, and overall motivation is reduced. People are now working in less than ideal environments, with children, parents, pets or other individuals sharing their space. Not to mention the mental health concerns that could arise as a result of the pandemic and social distancing.

In how it affects deals, we’ve heard from some folks that their deal documents go through extended revision periods based on drafting mistakes, their deal-related development work has slowed pace, and tasks generally take longer to complete, all as a result of isolated work.

A network connection of ours told us an interesting thought they had recently, along the lines of “If company office spaces didn’t make us more productive, why would we have them in the first place?”

What’s due diligence going to look like in the future?

For our legal team, the evolution of the due diligence process is a hot topic. We’re already starting to see a lot more focus on due diligence in the deals we’re facilitating, and we’re curious to see how it’ll evolve in coming months.

One of the big concerns on our mind is due diligence in compliance. We’re being asked by clients to pay special attention to compliance-related items and we imagine that those items will only become bigger foci in the future. Things like workplace safety procedures are coming up a lot in our discussions with clients and other lawyers.

Another trend we’re seeing is a lot of focus on updated business plans that take COVID into account. It’s pretty obvious that most companies can’t rely on their pre-COVID business and scaling plans anymore, especially considering we’re still in the midst of our reopening plans and don’t know what the future holds. We’ve spoken to a few folks who’ve told us that they’ve begun reiterating their roadmaps and numbers to take into account their market’s size, average spending power, among many other factors.

We don’t have the answers for what due diligence will look like in the future, but we’re certainly keeping a close eye on what the new trends are.