The world of venture capital has certainly not been immune to the global impact of the COVID-19 pandemic.
But despite the scale and breadth of the disruption, many startups and fledgling companies have discovered new and inventive ways to adapt. Indeed, many have found themselves having to pivot their offering, or shifting their business strategy to ensure that they still secure capital to fund their projects.
Others have been even luckier. For some companies, the pandemic has actually prompted a renewed interest in their business and opened up a field of promising new opportunities. Whether it is digitized customer channels and workflows, or real-time tracking and traceability tools, the crisis has created the need for pioneering solutions, and venture capitalists (VCs) have been paying attention.
No doubt, COVID-19 has presented many challenges to investors. But although there were concerns earlier this year about fundraising and market disruption, the crisis has not shaken underlying confidence. On the contrary, new data shows that funds raised in 2020 have already surpassed the total in 2019. According to a report from PitchBook and the National Venture Capital Association, U.S. venture capital funds raised $56.6 billion as of September 30, compared to the $54.9 raised in all of 2019.
With the promise of new solutions on the horizon and the consolidation of capital continuing to grow larger, emerging companies and the VC ecosystem have shown great resilience throughout such unsettling times.
Globally, we are likely to face further disruption yet in the coming months. As such, business leaders and investors alike will be wondering: What will the long-term impact of the virus be for companies in search of capital?
Understandably, the shift of focus toward pandemic-proof business models and solutions that can help us live alongside the virus might be troubling for some businesses in the long run. Some sectors, like those involving travel or hospitality technology, are likely to face further roadblocks.
Given the current situation, businesses that can sell and offer support virtually will have an obvious and immediate appeal for VCs. But these businesses were always an attractive prospect for investors, and the virus seems only to have accelerated the trend.
Founders should therefore expect to see further VC investment directed toward deep tech startups and organizations that promise profitability in the new normal. They will be on the lookout for long-term survivors that they can steer to sustained success; namely, companies that present clear solutions to modern challenges in the COVID era. Sectors such as biotech, fintech, e-commerce, and cybersecurity software have all been cast into the spotlight.
While investment activity did slow in the initial period of paralysis at the beginning of the pandemic, it is important to keep in mind that the pace and size of equity investments has remained strong. Indeed, demand for technologies that look to have a big impact by building new infrastructures is exploding, in part driven by the increasing availability of capital and reducing tech barriers to entry.
So, while early-stage funding rounds will still happen, significant emphasis will be placed on cost control and capital efficiency, as well as a plan to conserve cash, as downturns last longer than expected. As such, burgeoning startups in particular would do well to look to venture builders to secure funding, as well as the tools, advice, and network necessary to launch and grow their business.
Will investors become more aggressive on their terms?
Over the last decade, I have noticed that cleaner and simpler terms have increasingly become a norm in the venture investment process. This has been advantageous for all involved and has created more alignment between entrepreneurs and VCs. Using COVID as a backdrop, however, it would be fair to assume that some VCs will now be looking to impose fewer founder-friendly terms in an attempt to de-risk the investment process.
While startups should expect some readjustments as a result of the crisis, it is unlikely that there will be a full-scale return to complicated venture capital term sheets, as bad behavior will likely damage the reputation of investors in the long run.
From my recent experience, founders know their value, and if terms appear to be inequitable, then startups will simply walk away and look for an alternative partner — ideally, one that is able to help them de-risk their offering, rather than merely point out those risks.
The impact of remote working
The pandemic has also seen workforces all around the world trade in their office desks for their kitchen tables — and this has been no different for investors.
While there may have been initial concerns about the potential for mentorship, or the impact on closing deals without the possibility of meeting in person, from a purely mechanical perspective, most VCs have adapted neatly to the changing environment. Whether that is communicating with founders, or completing valuations, remote working has enabled investors largely to continue their business as usual.
Ultimately, even though working from home practices are set to remain the standard procedure for quite some time, VC trends are likely to continue going forward, with an overall increase in the remote mentoring of portfolio companies. Founders should become accustomed to this new process, if they’re not already, and find ways, like streamlining communication, to continue to successfully readjust.
While the VC landscape has endured some substantial change to cope with the pandemic, it is clear that activity is still strong. After all, crises often drive the need for innovation.
Published November 30, 2020 — 07:00 UTC