The Pandemic’s Impact on Venture Capital Firms

Posted on Mar 9, 2021

We recently had the opportunity to speak with professionals in the local venture capital community to get their perspective on how the COVID-19 pandemic has impacted their businesses. Over the course of our interviews, we noticed a few recurring trends and observations worth sharing. Here’s what we learned from our discussions:

Deal Making

Perhaps unintuitively, venture capital deal-making has continued to grow, hitting record highs amid the pandemic. Although there was an initial pause in investing during March to May of 2020, those we interviewed said fund managers have adapted to the changes quickly.

Investors have been pumping in money, not only to support struggling portfolio companies, but also to invest in new deals, particularly in later-stage information technology and healthcare concerns. The market also saw an uptick in special purpose acquisition companies (SPACs) and sponsor-backed private investment in public equity (PIPE) deals when the traditional publicly traded financing markets were less available. This was primarily due to the cost effectiveness of these transactions and speed of execution.

Diversity, Equity, and Inclusion

Private equity and venture funds further witnessed a huge influx of capital from institutional investors (such as foundations, family offices, pension funds, banks, insurance companies etc.). However, these institutions were hesitant to put money with lesser known managers. One venture capitalist we spoke with, who acts as an advisor to several start-ups, said a result of this hesitancy means many first-time managers (specifically, women and Black, Indigenous, and people of color (BIPOC)) struggled to raise money.

This troubling trend, along with the historic gender and ethnic disparity in the venture community, has led to intensified dialogues and increased focus on reducing the funding gap. As a result, more firms are taking action to address disparities in funding women and BIPOC founded companies.

“Pandemic-fit” Investments

Partners have been doubling down on enterprise software solutions that help with corporate remote working. Our interviewees also noticed a shift toward industries that provided cybersecurity and digital health type solutions. One venture capitalist we spoke with has shifted focus to providing pandemic-fit products, as opposed to market-fit products. The pandemic has also brought a focus on providing value-added services, a trend likely to continue once COVID has passed.

Communicating Digitally

Many VCs making investments locally were still able to have in-person, socially distanced meetings with their partners as part of the due diligence process. However, for investments made outside the Pacific Northwest, much of the communication has shifted online.

Despite the drop in in-person meetings, the total number of online meetings being held (both internally and externally) has increased exponentially as compared to the pre-pandemic period. Some fund managers have gone so far as hiring third-party service providers to visit the management of the portfolio companies instead of doing it themselves.

Overseeing Portfolio Companies

When it comes to overseeing existing portfolio companies, venture capital and private equity funds are working closely as partners with management to help navigate through the disruption. Strategies include categorizing portfolio companies into different buckets based on their financial performance, identifying any resources and liquidity needs, and then helping them procure funds, either in the form of capital infusion or external funding (such as bridge financing).

For one of the healthcare CFOs we spoke with, that meant putting all hands on deck. They created a cross-functional response team of people from all departments (technical, human capital, accounting, finance, legal team, etc.) to support their portfolio companies. They also hired operational partners to help portfolio management with necessary tools and technologies to be effective, such as artificial intelligence and analytics, and held regular meetings with CFOs to review operational performance, measure growth, perform benchmarking, and share best practices.

Changing Business Practices

This new remote environment has also warranted changes in the way fund managers are operating their own business.

Initially, partners were reluctant to hire new team members due to the inability to meet candidates face-to-face. However, the hiring situation wasn’t as dire as many people were expecting, according to one of our interviewees from a firm that provides administration services to private equity funds and venture capital firms. He now felt more comfortable with people working remotely and recently started providing “unlimited PTO” to employees. Employees also had flexibility when working remotely if boundaries were maintained around work. The effectiveness of remote working has led him to believe he will be able to downsize his current office space when all of this was over.

In Conclusion

Fund managers are optimistic about the future as several trends point to a promising 2021 for venture capital firms. Diversity, equity, and inclusion activities are on the rise, along with the recognition that there is plenty of opportunity for improvement. The pipeline of new deals looks robust, and, with the rollout of the vaccine, things should adjust soon to an improved ecosystem benefiting from what we learned in the pandemic.

If you have any questions regarding technology start-ups or venture capital in the PNW, please send us a message.

©2021 Clark Nuber PS. All rights reserved.

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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