Indicator Ventures on COVID-19
While this global pandemic has had an impact on our business and portfolio companies to varying degrees, it’s been inspiring to watch our founders step up to the challenge and reposition or even spin up new products to help society however they can, which is a testament to their ingenuity and character. This is a defining period for us as a country, and for the world, which our children and grandchildren will study in history books. While the fallout has been and unfortunately will continue to be devastating in many areas, we are hopeful that new products born of necessity will result in benefits for people and businesses across the social and economic spectrums. And we’re excited to back the entrepreneurs leading this next wave of digital innovation. Satya Nadella, CEO of Microsoft recently said, “we saw 2 years of digital transformation in 2 months.” The pandemic has forced companies to change at a pace never seen before, and breakdowns in regulation across healthcare, education, etc. have set the stage for the next age of digital transformations.
At the risk of adding to the ever-growing list of venture capital opinion pieces on COVID-19, we wanted to share our outlook, how we’re advising founders, how we’re approaching new investments, and our current thoughts on portfolio construction.
We’re assuming that the current social and economic environment will continue for the better part of a year, likely with lingering, albeit less acute, economic effects throughout 2021. Applying this forecast to our existing investments, we have generally encouraged our portfolio companies to haircut top-line base case estimates by 50% (and in some cases more) and try to budget existing cash on hand to last for at least 18 months, ideally two years. This would happen through a combination of headcount reductions, economic relief programs where appropriate, reduced SG&A spend, and in certain instances raising additional capital from existing investors while there is still momentum. If startups can avoid material forced changes to strategy and operations, and instead pull back on growth and focus on product enhancement and innovation, they will weather the storm and maintain a dynamic ability to grow when the environment improves. While it’s less clear how later-stage investors are approaching new investments at this moment (for instance, presumably focusing on in-network founders as opposed to building relationships purely over Zoom), the industry is flush with dry powder that will continue to flow to the best ideas and teams. In our opinion, round sizes, valuations, funnel conversion, investment pacing, industry benchmarks and leading indicators will all shift to some degree, but venture investing will continue.
Although this global pandemic has caused massive disruptions across the entire economy, we have fortunately avoided investments in particularly hard-hit industries like retail, real estate, manufacturing, travel, entertainment, etc. The major themes underlying our last 18 months of investments, always through the lens of digital efficiencies, have been “future of work” (remote/distributed workforces), digital health, next-generation mobility (i.e. drone infrastructure), and data accessibility. Though we’re not thematic-first investors, we will undoubtedly apply the realities of the current landscape and our best guess at a ‘new normal’ on a macro-level to our approach and evaluation of new investments.
To that end, we have a large percentage of our current fund available and will continue to invest at the pre-seed and seed stage. Our expectation of decreased round sizes and valuations will likely allow us to make our target number of investments for this fund with the same target ownership, while also shifting some capital originally earmarked for new investments to reserves.
Our strategy remains largely the same, with some adjustments on the margin to ensure the ability to support our existing investments throughout turbulent times. This is just our current thinking. Some of our peers have shifted more, others less or not at all, and we suspect that fund strategy and portfolio construction will vary across the board. We will of course continue to monitor the environment in real-time and adjust accordingly if necessary.
