When Chris Barbin announced in January that his growth-stage investment firm Tercera raised $225 million for its inaugural fund, he did so after six months of fundraising during which the pitch meetings with LPs were conducted virtually.
The firm’s investment team also met virtually with companies to potentially invest in. Barbin is based in Chicago, partner Dan Lascell resides in Boston and principal Lisa Burton hails from Minneapolis. With the fund closed and Tercera already starting to deploy capital, Barbin says the firm will remain virtual with no physical office even after the pandemic comes under control.
In San Jose, California, Anil Achyuta has taken the concept of virtual investing to a new level during the first year of working in lockdown.
Achyuta, investment director at early-stage TDK Ventures, says he reviewed 950 start-ups last year, invested in five and negotiated two exits. This activity included the $100 million acquisition of San Francisco 3D printing startup Origin by the Israeli company Stratasys and the November 18 IPO of hydrogen fuel cell start-up GenCell on the Tel Aviv Stock Exchange.
Achyuta says he managed his heavy workload in 2020 without stepping away from his desk, a result of the social distancing and work-at-home orders imposed from the pandemic.
“I didn’t meet a single person,” he says. “I couldn’t have done that before the pandemic.”
More than a year ago, Barbin and Achyuta would have been called outliers or nuts. But the pandemic has pushed GPs and LPs alike to adapt to new online practices. The VC community has abandoned the physical for the virtual.
But the physical is lurking. After a year into the pandemic, investors are starting to imagine a brave new world as they prepare to return to office in perhaps six months or a year with the covid-19 vaccines rolling out internationally. Investors anticipate a hybrid approach of routinely making virtual calls, followed by in-person meetings. Many, in fact, are finding it essential now to travel and hold meetups in person to close deals.
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Imagining the future
Even Achyuta, who talks of how effective he has been in the virtual environment, says he is eager to return to personal meetings once the covid crisis is in the rear-view mirror.
“Assessing the ability of a team to build an effective business requires face-to-face interaction. We hope that later this year we’re back to that dynamic.”
The VC community has evolved over time. It is standard now for venture firms to offer entrepreneurial support services in addition to financial backing. Seed investing has replaced Series A deals, while the growth stage has similarly ballooned. The industry is more democratized, and the availability of LPs and other sources of capital continues to expand.
“There’s a need now for venture to reset and reimagine how we behave and interact as many of the practices we adopted under covid are an improvement to the past. We have a chance to reshape the new normal”
However, those evolutions pale in comparison to what investors are now facing. It is no hyperbole to say that what the venture community is going through during the pandemic and how it comes out of it will mark one of the greatest changes in the history of VC.
Joe Horowitz has lived through much of this evolution over the years, having founded Icon Ventures in 2003. Before that, he was one of the first GPs at US Venture Partners in the 1980s and helped seed Sun Microsystems.
Underlying the tragedy of the pandemic, he says the current situation will be remembered for the new opportunities. “Prior to the pandemic, there were no virtual meetings,” says Horowitz, managing general partner of Icon Ventures. “VC is a service business. You meet on the premises. You go to the office. And we thought that this in-person touch was a necessary part of our job.
“But there’s a need now for venture to reset and reimagine how we behave and interact as many of the practices we adopted under covid are an improvement to the past. We have a chance to reshape the new normal.”
How we got here
When the pandemic escalated a year ago, venture activity all but died in March and April. Air travel halted. Conferences shut down. Meetings canceled. Office doors closed. GPs and LPs hunkered down and performed triage on their portfolios. They reached out on Slack and Zoom, or other meeting platforms that have now become de rigueur.
The early days felt dire to many.
In March 2020, before the coronavirus was officially labeled a pandemic, Sequoia Capital posted on Medium what has become known as the ‘Black Swan Memo,’ a warning to founders about the potential outcome of covid that the firm predicted would last for several quarters. It was reminiscent of Sequoia’s dark ‘RIP Good Times’ warning to its portfolio in 2008 at the onset of the economic downturn.
But this time the bleak prophecy didn’t quite pan out. Sequoia partner Roelof Botha told Bloomberg that in retrospect the way the tech world and investment community emerged from the early days of the pandemic was “a positive surprise.”
GPs and LPs found benefits
As many GPs and LPs have told Venture Capital Journal, the early days of the pandemic gave way to greater productivity. Suddenly, investors could schedule multiple meetings throughout the day, without sitting in traffic or waiting at airport terminals.
“Meeting virtually worked out well as a positive for the investment community,” says Charmel Maynard, associate vice-president and chief investment officer of the University of Miami.
He notes that the endowment quickly learned how efficient it was to use Zoom and maintain relationships with all its fund managers from San Francisco to Israel who otherwise would have taken a lot longer to see in person.
“We all adapted quickly, and the LP-GP relationships were maintained under covid,” Maynard says.
In New York, Crystal Huang, a principal at New Enterprise Associates, says it became easier to shift to a virtual environment. “Removing commuting from the equation allowed everyone to get more productive,” she says.
“It was a forced change, but it was a positive change that covid has brought,” says Vin Lingathoti, a partner at Cambridge Innovation Capital in the UK. Despite the tragedy surrounding the pandemic, Lingathoti says working from home made things easier while meeting LPs during the firm’s ongoing Fund II fundraise. “We covered more ground and talked to more LPs virtually.”
Shankar Chandran, managing director and head of Samsung Catalyst Fund in San Francisco, says he does not miss the air travel. “Board meetings are much more efficient using Zoom,” he says. “People prepare a lot better now.”
A banner year
Despite the pause in activity in March-April, 2020 was a banner year for VC. The US venture capital industry proved resilient and set new records, according to the PitchBook-NVCA report issued in January.
VCs overall deployed more than $156 billion into US companies last year, the first time annual investing topped $150 billion, and a 13 percent rise from the $138 billion in 2019. The investing was led by early-stage deals, which finished the year with $41.8 billion, surpassing the $40 billion mark for the third consecutive year. Meanwhile, late-stage investors deployed more than $100 billion in the US for the first time ever.
Eric Martineau-Fortin, founder and managing partner of White Star Capital, which has offices worldwide, says the firm was as busy as ever in 2020 and it also recruited five people to its team, having never met them in person during the pandemic.
He says he is not surprised at how much investment activity took place in the last year. He notes the pandemic created a lot of tech disruption, which accelerated developments by at least five years in telemedicine, edtech, food tech and e-commerce.
“The pandemic has been sad and tragic on a human level, but positive from a tech standpoint,” he says.
Similarly, fundraising was also robust last year, especially for established funds.
VC firms raised $73.6 billion in 2020, eclipsing the record $68 billion in 2018. Megafunds, or those over $500 million, led the way with a record 44 US megafunds closing, nearly double the 24 the year before.
One of the firms that completed fundraising last year was Madrona Venture Group in Seattle, which closed two funds totaling more than $500 million.
All the commitments were achieved virtually. Tim Porter, managing director of Madrona, says the firm might rely more on virtual tools for the fundraising process in the future: “It proved to us that fundraising is no longer an in-person business.”
But Madrona is an established fund. The downside to 2020 was that the number of first-time funds closed hit a seven-year low of only 50, and these raised just $3.9 billion, according to Pitchbook-NVCA, as some LPs were not willing to commit to new GPs they never met.
Tales of fundraising woe were commonplace last year from first-time fund GPs, who are looking forward to a chance to return to pre-pandemic activities of meeting potential LPs in person.
Apurva Mehta, managing partner of Summit Peak Investments, points out that GPs and LPs finding ways to connect has always been an issue, not just during a pandemic. Mehta is based in Fort Worth, Texas, while co-founder Patrick O’Connor works out of Seattle. Mehta notes how active the LP is, investing in fund managers while they kicked off fundraising efforts for their own second fund last summer.
“Once everyone in venture adapted to working without meeting face to face and having to go to The Battery San Francisco for coffee, we all got a lot of work done last year,” Mehta says.
Mehta says he and O’Connor found ways to meet with GPs and others via socially distancing, including a dinner event they attended on a hotel’s rooftop in Los Angeles in which the guests wore masks and had hand sanitizers available.
“We found ways to interact and that will continue,” he says.
Similarly, Nat Fraser, executive director at Agility Outsourced Chief Investment Officer, says that old routines of working on business travel have made working from anywhere less unusual in the past year. The firm, which works with university endowments, has offices in New York, Austin and Denver, where Fraser is located.
Though he admits the absence of in-person events – like annual meetings – has made it harder to network with GPs, portfolio companies and other LPs, having prior relationships helps. He expects that GPs will continue to reach out and “up their game post-pandemic” to strengthen connections with LPs.
“From lack of travel, I’ve found myself with extra time to meet so many more groups over Zoom,” he says.
Chandran of Samsung Catalyst agrees: “Zoom has flattened the world, it’s democratized us as we dial in from our homes, and we intend to keep weekly Zoom meetings.”
Pandemic silver linings
Calling the current situation a new normal, as many investors do, implies that the virtual lifestyle and other attributes under covid restrictions will remain in place for months and years to come. And they just might.
Mehta says a silver lining within the dark pandemic is how he and co-founder O’Connor talk daily over Zoom. They didn’t do that before. The partners also virtually met last year with a potential LP based in Shanghai. Mehta says Summit Peak spent about $250,000 on travel costs in 2019, but no more.
“Previously, we would’ve jumped on a flight to China. But we’re now getting as much done as possible,” Mehta says. “Why would we want to change our efficient way of doing business?”
Fraser similarly anticipates a combination of virtual and physical work life post-pandemic that will open up new opportunities to meet new emerging managers and cultivate new relationships.
Horowitz at Icon also notes some silver linings to the pandemic. He says the firm is expanding its geographic focus, reaching out to companies in such areas as New York.
He adds that using virtual meeting tools allows for more of the Icon team to get involved since meeting rooms are not limited to the physical size of the conference room anymore.
“Venture is innovating itself,” Horowitz says. “It strikes me that we will see more changes that will stick around.”
The notion of tech innovation happening anywhere is also noted by Aziz Gilani, managing director of early-stage Mercury Fund in Houston, Texas.
Gilani points out that the pandemic has upended old operating strategies. Previously, he says the firm defined its geography around jet travel. Deal candidates could not be located more than two hours by air from Houston.
“No rules exist like that for anyone anymore,” Gilani says. “And I certainly don’t want to go back to those limitations.”
He has adopted structured office hours to meet entrepreneurs through digital groups, such as the Capital Factory, a tech accelerator in Dallas. His perpetual on-screen meetings have proven an acceptable substitute for spontaneous interactions that would have occurred before the pandemic.
“We are talking to large blocks of entrepreneurs that we wouldn’t have been able to meet before the pandemic,” he says.
He spends so much time in virtual meetings that he found it difficult to keep his equipment charged. He now keeps two pairs of wireless ear buds for a long day of virtual meetings. He uses the first pair during the first half of the day and then grabs the second pair for the rest of the day.
Competition will force change
However, not every VC thinks that 100 percent virtual investing is here to stay.
Eric Engineer, a venture partner at S3 Ventures in Austin, Texas, says: “Face-to-face meeting was something that we valued very much. My intention would be to still meet people. There’s definitely a thirst to get back into the office.”
Despite social distancing guidelines, Engineer says a couple of his partners decided to take a risk and meet face to face with teams in which they were investing. The firm was involved in four deals last year, including two seed fundings.
That need to meet face to face is proving a competitive advantage many investors are certain to encounter in the coming months as vaccinations increase and people resume office work and make travel plans.
Don Butler, managing director of Thomvest, said in early January that he expects to be back in the office in July. The firm has an office in the highly prized area of South Park in San Francisco. Butler says he was impressed with how everyone adapted last year, which he described as a normal pace of investing. Thomvest was also able to hire an associate without meeting her in person.
But going forward, Butler says the advantages of virtual meetings will get more tested. No matter how efficient the virtual gatherings are, he says that companies are expecting in-person meetings with investors.
The company was based in Los Angeles and several firms were in pursuit of striking a deal with the founders. “We lost the deal because we didn’t hop on a plane,” Butler says. “A competitive firm flew down and met the company over the weekend and signed the term sheet.”
“In this virtual environment that we all are working in, the in-person meeting is the only real differentiator. And when confronted by competition, you will do what you need to do to get the term sheet signed”
New Enterprise Associates
When a similar situation arose with a potential deal in Chicago, Butler says the team flew out to meet in person. The company had air purifiers buzzing in the meeting space and social distance precautions were in place. The company noted that Thomvest was the third VC firm to visit on site. Thomvest invested in the company, though that deal remains undisclosed.
Butler says the firm will continue using Zoom for initial meetings, but competitiveness is driving in-person interactions.
“We lost one deal because we underestimated the importance of in-person contact, and we won a deal because we didn’t,” Butler says. “There’s something to be said for the in-person interaction.”
The competitive nature of the business is what made Huang of NEA return to New York. She initially was in Vancouver with family at the onset of the pandemic, but she says she saw the need to be in the city for when an in-person meeting with a start-up was needed.
“In this virtual environment that we all are working in, the in-person meeting is the only real differentiator,” Huang says. “And when confronted by competition, you will do what you need to do to get the term sheet signed.”
Huang anticipates virtual gatherings will remain for the venture world for initial meetings, and she says investors will learn to increase the efficiency of taking hundreds or thousands of virtual meetings. But closing deals will require physical contact.
Value of f2f
The question remains: what will a post-pandemic venturing look like?
Once covid restrictions end, Porter of Madrona says he and his investing colleagues will not return completely to in-person LP meetings.
Working remotely from a home office has taught Porter how to be more efficient, though he says he still misses meetings’ face-to-face interaction, especially at conferences. He says he does not believe onscreen gatherings can replace events.
“The pros are that there is an efficiency to virtual meetings. You make lots of calls quickly,” he says. “It’s less of an ask to do a reference call; we can quickly jump on a Zoom and that’s great. The downside is that there is little personal connection. It’s harder to get to know someone over Zoom.”
He and other investors anticipate a hybrid approach. The way it will operate is that GPs and LPs alike will take a ton of virtual meetings, and then in-person encounters will occur to finalize deals over handshakes, or rather elbow bumps depending on your comfort level.
People will return to their offices, for part of the time, too, to interact each week with colleagues.
Lingathoti of Cambridge says he cannot imagine going back to the office five days a week.
“I’m seeing a big shift with our portfolio companies, hiring distributed teams from India and Copenhagen,” he says. “Hiring the best talent and letting them work remotely will stay a trend.”
That decision of whether to return to office has already been decided by some.
William Taranto, president of Merck Global Health Innovation Fund, told VCJ last year that the firm does not need its office space anymore. He says they have learned to conduct board meetings virtually and he does not anticipate ever having to travel so much again. As Taranto puts it, no more “10 hours of travel time in airplanes and cabs just for a two-hour meeting.”
Most of the larger, established funds VCJ contacted for this article say they have no plans to permanently shut their doors to go all virtual. Buildings have barely been occupied for the past year, but firms are planning to return, and many anticipate a hybrid approach to meeting virtually and in-person.
Horowitz of Icon Ventures says the firm will keep its Palo Alto and South Park offices.
Shasta Ventures is keeping its Menlo Park location near Quadrus, though it closed its South Park location for good last year.
“This is a unique time in our history and as investors we have to adjust quickly or be left behind. It could be that we don’t need physical offices one day, but we’re not quite there yet”
White Star Capital
Storm Ventures last year shut down its Menlo Park office near the clock tower, though managing director Ryan Floyd says the firm has opened a smaller office for the finance department to work out of.
“It was nice to have entrepreneurs come to our offices to meet, but it’s not a good use of their time,” Floyd says. “Virtual meetings will continue, especially first meetings over video since it is often so hard to sync schedules.”
Future of work
To understand what the future for venture capital is, a lot can be gleaned from the international firms, such as White Star, Cambridge Innovation and Samsung Catalyst.
Not only do they have offices in several time zones, but they invest across geographies and have a mix of international backers. The way they operate is a model for how venture professionals will get their jobs done post-pandemic.
Martineau-Fortin of White Star assumes travel will pick up soon, perhaps in less than six months, as vaccines become widely administered, but he anticipates firms will not rush to fly around the globe again.
“This is a unique time in our history and as investors we have to adjust quickly or be left behind,” he says. “It could be that we don’t need physical offices one day, but we’re not quite there yet.”
He says White Star itself will continue to work remotely where they are based, whether a partner is in Colorado or Portugal, as long as they are engaged and focused on work. The firm will continue gathering on a regular basis to collaborate in person.
“This is our advantage and how we have operated and scaled over the last seven years,” he says. “This is now the future of work.”