How Venture Capitalists Can Succeed in a Remote World
The COVID-19 pandemic shut down the economy, left millions out of work, forced many companies out of business, and pushed many activities to the virtual world. You might assume this may not be the easiest time to work in the VC world.
That’s not entirely true.
According to CB Insights, US-based, venture-backed companies successfully raised nearly $130B in 2020, an increase of 14% over the prior year. Notably, however, deal concentration continued to increase as the dollars were invested across a declining number of deals.
Maybe it shouldn’t be surprising that Venture Capitalists — whose role is to put a valuation on uncertainty in order to generate returns — managed to set decade highs when it comes to deploying capital in a year like 2020.
What do these trends suggest in the context of the global pandemic? Do VCs need to adjust expectations and reconsider how they operate? If so, how and, importantly, for how long?
Do the changes brought about by the pandemic represent short-term adjustments or represent structural, long-term shifts within the industry — and what opportunities do these create?
Venture Capital Remains Resilient
There appear to be several key takeaways for both founders and investors. The first is that the industry has been resilient when it comes to raising and deploying capital.
Given the recent exits of long-held private companies such as Uber, Airbnb, Palantir, DoorDash, among others, and the increasing use of SPACs to more quickly do so, there is a trove of investable cash on the sidelines.
Second, however, is the aforementioned concentration in capital (total capital into fewer deals) that suggests that much of this funding is heading towards follow-on rounds and feeding portfolio Unicorns. This may present challenges to first-time founders and companies seeking seed-stage capital. But may also be an opportunity for VCs looking to do new deals.
Yet, this begs the question: Is this a continuation of a broader trend we’ve witnessed over the past half-decade and/or the impact of a remote-only environment brought on by the COVID-19 pandemic?
If influenced greatly by the latter, then how should fundraising strategies change to fit the new environment?
The COVID Impact
Given the obvious challenges to travel and in-person work, most VC pitches are now happening remotely. This is a fundamental shift for those who believe the face to face nature of pitches is critical for establishing an interpersonal connection.
However, as the data suggests, even despite today’s complex COVID-19 environment, there is still an opportunity for startups to raise funds, and VC’s to capitalize on new opportunities. In fact, challenging market environments, despite the obvious risks, can be an excellent time to uncover innovative solutions to previously unknown problems.
Take for example companies such as Uber, Airbnb, Slack, and many decentralized and blockchain-based technologies that launched during the Great Financial Crises given some of the tailwinds that accelerated their adoption.
Shifting from the founder perspective to that of funders, what challenges and opportunities are now present and how might they shape the industry moving forward?
A New Workflow for Fundraising
To address this question, we discuss the five key trends we believe to be most impactful for Venture Capitalists navigating into the post-COVID world.
1. Work your network…virtually.
Since you can’t rely on the physical network effect of being in (e.g.) Silicon Valley anymore, you need to explore virtual ways to increase connections — and expand your network.
As you know in VC it is important to ensure the involvement of the right people, especially in the assessment phase and during Q&A interviews. This means branching out and doubling down on asking for warm introductions, attending relevant virtual events, engaging with people on social. This can not only open doors to initial meetings, but also strengthen your credibility.
2. Address risk with transparency.
Investors face significant challenges in predicting outcomes during normal times, and few can reasonably say they foresaw the impacts of COVID-19 at the industry level. We witnessed this industry and sector dispersion in the public markets as companies best positioned to take advantage of the work-from-home environment accelerated growth during the crises, leaving behind their brick-and-mortar counterparts.
These types of risks mean new considerations for VCs who intend to learn from these unique market shocks — so adjustments to the due diligence process will need to be made.
This means that for those operating or intending to develop new markets that have seen significant shifts or changes due to the pandemic, new questions may need to be asked. Examples of these will focus on things such as:
- Is this market newly created in the aftermath of the pandemic? If so, what assumptions have been made about the potential size and longevity of the market?
- What is the purpose of the fundraise? Is it for strategic purposes or is it a lifeline? If for strategic purposes, again, is the strategy likely to make sense under “normalized” markets, or is it a response to what may be a short time effect?
- How has the competitive environment changed in the last twelve months? What competitors have failed and what (potentially unknown) competitors may rise?
VCs need to understand and assess both the risks facing companies as well as the potential staying power of these risks. Many changes in consumer habits, for example, will revert in a post-COVID environment while some represent significant and long-lasting changes — where does the company sit along those guidelines?
3. Stick to the fundamentals
Continuing the theme of risk management, the lack of in-person time means that VC’s need to stick to the fundamentals of fundraising more than ever.
So what does this look like from the perspective of managing a fund?
Foundational to the fundamentals of the VC process is strong communication. This means deeply understanding the VC team you’re working with and keeping them all in the loop with what you’re doing. When you’re remote, it can be difficult to keep an entire VC in the loop vs. your point person. But the most critical decisions are usually made through your team.
Operationally, it means ensuring that communication with portfolio companies and founders is happening. While the images of War Rooms spread thin with empty coffee cups may be a relic of the past, learning how to organize virtually is a new skill that needs to be developed. If not already, incorporating collaborative tools (from basics like Slack and Trello to enterprise tools like Jira) should become commonplace when thinking about the future of fund operations.
A distributed team means fractures in what may have felt like easy tasks such as pulling together performance reports and providing LP updates. Leverage tools like Gust, AngelSpan, and AngelList that help startups organize, and most importantly share, items such as cap tables, financials, and KPIs are another important consideration for best-in-class operating practices.
Ultimately, use this as an opportunity to prove yourself as a leader in both “peace and war.” Times of uncertainty can be the best time to give investors confidence that you can keep your cool even in tough circumstances.
4. Exercise Founder Empathy
Doing business virtually is a perfectly viable mechanism for connecting. But, it’s obviously still much different than being in person. It may be harder to build a real connection, but it isn’t any less important. So it’s also on you as the VC to make founders feel comfortable.
Exercise those founder empathy muscles as a sign of strength and leadership, not weakness. Recognize the challenges of building a company, especially during a global pandemic.
Just as in person, a little initial small talk can help build rapport and understand each other more. A lot of people claim they “hate small talk,” but it serves a valuable purpose. It can serve as an icebreaker to help serve as a bridge for people who are about to have a high-pressure conversation. Even if that convo is just about the weather, it can still say “We’re in this together.”
5. Make it Tangible
Thus far we’ve focused on creating transparency, ensuring communication channels remain open and taking the opportunity to perform an audit of your fund operations. But what about the necessary ongoing of sourcing quality deals and assessing whether or not to fund a company?
Product due diligence is clearly not the same as it once was given the limitations of lockdown. If you’re taking a meeting with a founder who has a physical product, make sure they send a prototype to the firm ahead of time so you have access to it during their virtual pitch.
Also, when you do conduct meetings, make sure everyone has access to their specific documents. Consider leveraging virtual data rooms for increased data protection and access control features.
As you have undoubtedly witnessed if you’ve purchased a physical product in 2020, supply chains are struggling with capacity across many industries. Add this to the considerations for the due diligence process for companies developing physical goods but also recognize that many of these impacts will be short-lived in nature (including perhaps shipping out the aforementioned prototype!).
Even when we’re discussing the pandemic in the past tense over a meal at a packed restaurant, much of what it left in its wake will remain a part of a life long into the future. Included in this are the trends in remote work and virtual networking.
With that in mind, there are opportunities among the challenges, and VCs who keenly take advantage of them are going to be best positioned to emerge stronger.