How has COVID-19 changed the VC investment landscape?

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3 fallacies startups have about venture capitalism

by Salvatore Minetti, CEO of Fountech.Ventures

In many ways, the COVID-19 pandemic is more than just an epidemiological event. The virus has been unprecedented in the size and nature of its impact across all sections of society—and the investment landscape has been no exception.

The onset of the virus has prompted startups and burgeoning companies to pivot their offerings, with many finding new and pioneering ways to survive and secure investment in the “new normal”. Some companies have been luckier than others, with the pandemic re-igniting interest in their business.

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Here at Fountech.Ventures, for instance, we have seen the deep tech space rise to prominence. Demand for technologies that look to have a big impact by building new infrastructure is exploding, and this is in part driven by the increasing availability of capital and reducing tech barriers to entry.

While an initial dip in confidence was to be expected, new data shows that funds raised in 2020 have already surpassed the total in 2019, despite the unremitting uncertainty. According to a report from PitchBook and the National Venture Capital Association, U.S. venture capital funds closing this year had raised $56.6 billion as of September 30—more than $54.9 raised in all of 2019.

Although the venture capital market has proven resilient, the pandemic has still reshaped the market in many ways. And with the virus showing no signs of abating just yet, founders and investors alike will be wondering what the long-term effects will be for companies looking for much-needed capital.

A Shift in Investor Behavior

Over the last decade, cleaner, more founder-friendly terms have increasingly replaced the onerous provisions traditionally demanded by VCs. It is fair to presume that, in an attempt to de-risk the investment process in the post-COVID landscape, investors might try to reintroduce some of their old tactics and in turn herald the return of convoluted term sheets.

Thankfully, it is unlikely that the pandemic will prompt a reversion to aggressive terms, although founders should be ready for some adjustments. No doubt, VCs will be more cautious in the short term, but they will also be eager to back businesses offering innovative solutions to new obstacles.

In the long-run, aggressive terms will affect the most important currency in venture capital: reputation. In my recent experience, founders know their value, and as such, they will walk away in search of a new partner offering more agreeable terms: ideally, one that is able to help them de-risk rather than merely pointing out those risks.

Recalibrating Sector Focus

There are compelling opportunities across many sectors that the pandemic will accelerate. In the current climate, digital-first business models will have a more immediate appeal for VCs, with changing consumer behavior further driving demand for solutions that can digitize physical processes.

Founders can expect to see further capital directed towards companies in the artificial intelligence (AI) and data science space, that promise profitability in a time of uncertainty. Investors will be on the lookout for long-term survivors that they can steer towards sustained success; namely, companies that present clear digital solutions to modern challenges. Notably, industries such as edtech, fintech, and ecommerce have all recently been cast into the spotlight due to the nature of their pandemic-related problem-solving capabilities.

That said, in order to safeguard their reserves, VC investors are still unlikely to engage until the later stages of the startup journey. Instead, they will look to back already established business models and those who already have pre-seed funding. Startup founders would therefore be better off looking to venture builders that can not only offer early-stage investment, but also the tools and support needed to navigate these uncharted waters.

The Long-term Impact of Remote Working

The introduction of social distancing practices has seen the en-masse switch to remote working, with companies all over the world trading in their office desks for their kitchen tables. For the investment landscape, initially, this was cause for concern. With face-to-face meetings no longer an option, founders were apprehensive about the lack of opportunities for mentorship. Meanwhile, investors will have been concerned about the dampened prospect of closing deals.

However, this needn’t have been the case, as it seems that VCs and startups alike have transitioned comfortably into the world of remote working. As the figures show, investors have been able to manage their day-to-day with minimal disruption; whether this is completing valuations, or offering advice to founders, the new business as usual has largely been a success.

This is not to say that the changes have been without complications; it is safe to say that the process has required some careful thought and adjustment. VCs and portfolio companies alike will have needed to review their internal business plans and processes to decide how best to build relationships and scale businesses in a virtual setting.

Yet this is not necessarily a bad thing; while not meeting people in person can make things difficult, remote working has served to highlight the value of strong communication. Indeed, VCs will likely have a deeper understanding of their portfolio companies and the challenges that they face on a daily basis as a result of more frequent and strategic communication.

All things considered, opportunities are certainly there for progressive markets and investors. I anticipate seeing more promising startups demonstrate their inherent ability to make the most of a crisis, with the aid of forward-looking VCs at their side.

Salvatore Minetti of Fountech.VenturesSalvatore Minetti is the CEO of Fountech.Ventures, which acts as venture builder and investor for deep tech and AI startups. With a presence in Austin, Texas, US, and London, UK, the company supports startups through the stages of ideation, development, commercialization and funding.

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