November 15, 2020

COVID Not Slowing VC Investment

By c05tkey

The COVID-19 pandemic has battered industries around the world, but one sector’s prospects aren’t so bleak: venture capital.

Startup backers—and private-equity managers in general—say that half of their portfolio companies haven’t been harmed by the coronavirus that stalled the economy in March, according to two new surveys by Paul A. Gompers, the Eugene Holman Professor of Business Administration at Harvard Business School. Only about 10 percent of companies in this often unpredictable industry have been severely affected.

Despite the economic uncertainty, 91 percent of venture capitalists expect their investments to outperform major equity indexes going forward, and they’re continuing to fund new endeavors.

“It’s sort of the opposite of doom and gloom,” Gompers says. “We were surprised by how relatively unaffected the venture industry was.”

In collaboration with the National Bureau of Economic Research, Gompers teamed with Will Gornall of the University of British Columbia, Steven N. Kaplan of the University of Chicago, and Stanford University’s Ilya A. Strebulaev to survey more than 1,000 venture capitalists at 900 firms from late June to mid-July.

“THE BULK OF VC INVESTORS ARE LOOKING TO DO NEW DEALS. THEY’RE JUST SITTING ON A TON OF MONEY.”
During that period, global daily deaths had topped 9,000 for a second time as infection rates were soaring across the Americas. Almost all of the world’s 10 largest economies were contracting.

Despite the widespread pain, venture capitalists surveyed—who collectively manage $340 billion in assets—said they expected their funds to prosper. However, two-thirds acknowledged that investing had slowed. During the first half of 2020, they invested at 71 percent of pre-pandemic levels, a rate that they expect to climb to 81 percent by the end of the year.

Venture funding in a socially distanced world
Discouraged entrepreneurs shouldn’t put away their pitch decks yet. For one thing, funding commitments are still outpacing those of past periods of economic distress, the researchers say. US-based venture capital firms also entered 2020 with strength after raising $46.3 billion in 2019, the industry’s second-best year of the past decade, according to the PitchBook-NVCA Venture Monitor.

“The bulk of VC investors are looking to do new deals,” Gompers says. “They’re just sitting on a ton of money.”

Perhaps reassuringly, a far more basic factor has been holding back investment: remote work. Lockdowns and rising COVID-19 cases prompted many venture capitalists to literally head for the hills, decamping to vacation homes in Wyoming and Idaho. Even with its close ties to Silicon Valley and emerging technology, the loss of in-person pitch meetings has stymied an industry used to schmoozing.

“Informal networking is so critical to deal flow,” Gompers says. “And of course, less time is being spent on networking because you’re not physically together.”

The pandemic might also delay initial public offerings, forcing venture funds to hold investments longer than planned. To ensure smooth exits, many venture capitalists have redirected their time from deal-making to shoring up portfolio companies.