Crises accelerate existing trends, and the entrepreneurship community is no different. As the covid-19 pandemic and its economic implications continue, there’s been a shift in VC that we can all feel.
- Deal terms seem more balanced;
- Impact-focused companies are getting more attention; and
- VCs are more “hands on” with their portfolio companies.
These are not new trends, but the coronavirus has pushed things along faster than ever. Here’s how I’m seeing things play out.
Evening out the deal
Since mid-March, investors have been leery of doing new venture deals, but that is slowly thawing. Before the crisis, “hot” companies commanded insane valuations, while struggling start-ups kissed hundreds of frogs to find lead investors. This is neither good for the unicorns, nor for the rest of the business community.
A reasonably priced start-up ecosystem might mean the following:
- Dollars are spread around more fairly, including to diverse founders and those outside of innovation hubs;
- Capital is less likely to be eaten up by inflated valuations, remaining available for more companies generally;
- Companies are forced to grow more intelligently, instead of being so focused on fundraising KPIs;
- Funds may experience less volatility: the idea that funds should seek one or two unicorns could lose some currency; and
- Investment deal terms are likely to be more balanced, instead of investor-friendly for scrappy early companies and founder-friendly for massive unicorns.
Impact is here to stay
During the 2008 recession, so-called “impact investing,” putting money behind companies that solve society’s problems, took a huge hit. Not this time. Companies that directly address covid-19 are benefitting as biotechnology and medtech are booming, but so are companies that address the future of work and employment, distance education, telehealth, protective equipment, virus spread contact mapping, financial inclusion, portable benefits, and much more.
I’ve heard from colleagues in the impact investing space that their portfolios seem to be less affected by the crisis. It stands to reason that if you invest in socially-responsible companies, then when social problems become more acute, your companies will be there in the front lines, responding and growing.
What’s more, large asset managers and wealthy families are moving toward impact. In a crisis like today’s, investors absolutely want to know that their cash is helping communities, health, and sustainability for our economy and planet.
Sum total, impact investing was already on the move, but this crisis is accelerating the trend in the right direction!
Many VCs have more to give than money. The venture studio model, for example, is defined by active engagement with portfolio companies. There has been a clear uptick in this behavior lately and the infrastructure is growing to match. VCs are increasingly reaching out directly to founders with ongoing support and network access, and building platform teams, networks, and operating partner roles to deliver on these promises.
In the present environment, many VCs have gone into triage mode with their existing portfolio companies, helping them figure out how to cope with revenue streams suddenly drying up, or, even responsibly pivot toward coronavirus-related opportunities (such as cloud and data services, grocery delivery, telehealth and wellness).
Entrepreneurs are increasingly benefitting from their investors’ operational, managerial, and engineering experience to help focus on business fundamentals sooner.
In my view, the start-ups most likely to succeed have a team of hands-on investors helping them navigate. Active (or rather supportive) managers are more relevant than ever in a crisis.
Don’t get me wrong, today’s environment is a difficult one in which to raise capital. Unemployment is up, industrial production is down, supply-chains are disrupted, and the market is volatile.
But deal terms are balancing out, impact is crucial, and VCs are dialing up their engagement. After all, historically, the best time to start a business is during a downturn. Start low, build high!
Oliver Libby is managing partner and co-founder of venture firm Hatzimemos / Libby. He focuses on high-growth businesses that add value to society. He tweets at @OliverBLibby and is also on LinkedIn.