How 2020 has changed the venture business
Written by Damien Steel, Managing Partner and Global Head of Ventures
As we approach the 10th month of this global pandemic, there is light at the end of the tunnel, but the disruption is far from over. I want to document the enduring shifts I believe we’ll see in the VC world. These are my thoughts today. Ask me in another nine months and they may change, but I wanted to capture this moment in history. Without a doubt I have missed some — so please feel free to add your thoughts to this.
I spoke to a number of fellow investors to get their views about the lasting effects brought about by our pandemic experience. A special shout out to Angela Tran from Version One, Clara Sieg from Revolution Ventures and Prashant Matta from Panache Ventures for sharing their thoughts with me.
Observation: shift from private to public capital
Pre-COVID we were already seeing a shift in the VC world toward more ‘responsible’ investing. We certainly sensed a move away from highly subsidized growth. Private companies were starting to adjust to the idea that there wasn’t unlimited private capital. The pandemic accentuated this for a while as capital dried up for a short period. However, capital is flowing again — partly driven by public market comps which are close to all-time highs.
It now seems to me that the private market subsidized growth of 2019 has been replaced by public market growth arbitrage — public companies are trading at such high multiples (providing an extremely strong currency for operations and acquisitions), which allows them to purchase private companies (for something like 10x revenue) and immediately get the bump up to their 20x revenue multiple. It used to be that public company share prices would drop after an acquisition. Today however, public markets seem to be maintaining pricing multiples post acquisition and in some cases even increasing. Just take a look at the great acquisitions completed by Lightspeed (LSPD-TSX) this year as examples.
COVID-19 has led to tech being thrust into the limelight and it hasn’t looked back since!
Many people think that technology’s current momentum is a fad that is soon to end. I don’t agree. I feel like there is longevity to this wave and expect capital markets for technology companies to remain strong well after the vaccine is distributed. There has never been a better time to start a tech company. Where the public markets go, private capital will follow!
Observation: the demise of geographical barriers
We have all seen an overnight openness to hiring remote top talent — for many businesses this was essential to their survival or key to their growth. Suddenly being ‘in the valley’ holds far less currency for both the founder and the VC. Tech companies are quickly adopting remote workforces and capitalizing on cheaper talent outside of the traditional tech hubs. The pandemic has also increased the pace at which VCs are looking at new geos — this was beginning pre-COVID.
The fear that employees can’t be as productive if they are working from home has all but evaporated, though it has been replaced with questions about how to maintain company culture in remote situations. Startups and VCs alike will continue to consider remote talent as valuable and viable. The trend of VCs fishing elsewhere will also continue as founders choose to start businesses in less traditional markets.
Observation: new VC talent severely hampered by lack of networking opportunities
This is the observation that concerns me the most for our business. Global lockdowns have severely limited the opportunity to bump into someone and hear about something interesting. Associates and Analysts at venture funds have been hardest hit by this lack of serendipity. It will probably delay their network building by a year. The smart ones realize they are all in the same boat and are getting very comfortable at cold reach outs to other Associates, and to founders, to build networks.
On the flip side for founders, it used to be notoriously hard to get a VCs attention without a warm intro. Arguably that has gotten easier. Young VCs in particular are dying to build networks, so they are more open than they were in the past and have more time to respond because they are not travelling as much.
It’s harder to forge trusting relationships, but existing relationships are getting stronger as we all face common battles. My guess is that VCs are now “horse trading” more due to the lack of conferences or other means to source deal flow. And a lot of that horse trading is done at Partner level.
Partners are doubling down on existing networks and tapping into existing portfolio company founders to find deals is becoming increasingly popular. Seed funds have become the primary hunting ground for series A-B investors — even more than before.
This is one area that I do think will revert back somewhat to past behaviours. While I don’t believe many of us will go back to traveling as much anytime soon, I do expect conferences start up again late next year. Personally, I miss face to face networking and look forward to returning to my favourite coffee shops! The focus on seed funds as a natural funnel for deal flow will continue as will the use of data described in the next point.
Observation: VCs are leveraging data more than ever
Yes, we might have lost all of those important opportunities to meet founders, hear whispers about hot new companies, meet potential co-investors, but it has led to some innovative thinking in our businesses/ sector and many funds (including ours) are looking to AI to help shortcut insight to the hottest new companies. Arguably this has happened far quicker as a result of the pandemic and will certainly endure. Good investors have also turned to data to help bridge the gap in diligence created by an inability to meet founders.
As an industry we will inevitably continue to leverage tech to do our jobs better and to analyze data in order to make better decisions. The experienced VCs know that it’s a founder driven industry — you back great founders. Data serves as a way to highlight trends and find hints of brilliance but doesn’t replace the skill of evaluating a founder. Off sheet referencing has become much more important to try and do just that. Our referencing went from 10–20 per deal to > 40. Incredibly (I never would have said this before) I expect this to stick!