Raising Venture Funds under Uncertainty

We participated in over 100 venture pitch meetings last year. And while we are not running at that pace this year, we have still been speaking to a lot of people around the venture ecosystem in recent months. Surprisingly, we have found that our recent posts on fundraising (and here) have resonated with a lot of investors. TL;DR – deals are getting done, but are taking a lot longer, working remotely creates a considerable cognitive burden on investors too.

Our conversations last week all tended to revolve around the same themes.

First, the second wave of Covid is coming. (Alternatively, we are still in the first wave and it is not cresting.) Conditions are starting to look a lot like Scenario #3 in this post. Beyond the direct damage the virus will do, there is an important corollary that when this wave ebbs, consumers are going to be twice as slow to come back to normal spending patterns. People are learning to not trust the directions they got from the government, and left to their own devices will tend to be extra cautious in their decision making. This means the damage to the economy is going to last a lot longer. Using China as a guide, their economy saw a quick rebound after their lockdown eased, but that plateaued well below pre-Covid levels, and that trend was clear even before the latest outbreaks they are now dealing with. We are not qualified bio-statisticians, so we will not say anymore now about the virus, except, wear a mask.

An offshoot of this theme is that investors are re-calculating their portfolio math. Venture investors are always assessing the prospects for their portfolio companies, allocating their finite pools of capital. There is an element of zero-sum math to this, often unspoken, with promising companies more easily able to raise follow-on rounds from current investors. Clearly, many companies are going to need extra financing to weather this storm. That leaves less capital for the companies on the borderline. We have not heard many stories of companies being explicitly relegated down from the portfolio, but there are plenty of indications that this is coming.

The second theme we heard was the stock market is not a meaningful indicator. Yes it is flying high, but that is being driven by free money from the government. Other than redistributing wealth to Wall Street, having the market up is seen as mildly positive, but not a reliable indicator of the broader economy.

Another common topic is investing themes. For the most part, everyone we spoke to was sticking with their investment theses. They were looking for the new hot company, as always, but in the same areas as before. Over the past few months, we have spoken with investors who are radically shifting their focus, but they are in the minority, at least for now.

This is, if anything, encouraging. No one thinks that we are in for a radical realignment of the economy. Hard times yes, but not a major change. Conditions will be challenging for many companies, especially those levered to the most vulnerable industries (e.g. travel). But for the moment at least, the thinking seems to be some day health conditions will improve and the economy will new-normalize. And then people and enterprises will go back to needing better software and better electronics. The end markets may look different, but the fundamental problems that the Valley is good at solving will still exist.

Finally, we still see a lot of money on the sidelines. Many people believe there are going to be some great opportunities for investment ahead. It is hard to gauge the timing for those to emerge, but there still seem to be investors looking to participate.

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