Navigating the Shifts of the VC Landscape
Excerpts from Endeavor’s Multiplier Effect Podcast
Excerpts from Endeavor’s Multiplier Effect Podcast
Two weeks ago I was invited to Endeavor’s “Multiplier Effect” podcast to give my personal perspective on shifts I’m seeing in the VC and startup ecosystems as well as some tips on how entrepreneurs can successfully identify investment partners during these unprecedented times.
Below is an excerpt from the podcast that focused on how both VCs are evaluating opportunities and investor characteristics founders should consider in this market. Thanks to Canem Arkan for having me on the podcast. You can find the entire episode below.
How VC’s and Founders can evaluate opportunities in this market
[Canem Arkan] You’ve said several things I really want to go back and touch on, but the one that was really interesting and funny was that working with venture capital companies is like working in equity research, but with way less information. And I think that’s more true now than ever. We had models that would look at yearly development. We’d make certain assumptions. But now we’re operating in this black box because of COVID-19. I mean, you know, what does it look like for our companies in six months or nine months? Honestly, you probably have a lot more vision around that. But it feels very unknowable right now. So I’m really curious. One of the several things we want to talk about for our listeners today is, you know, in this environment, how do venture capitalists and maybe you can relate this across your experience over firms, but how are you thinking about evaluating companies? How are you looking at the world with so much more that’s unknowable than this time last year?
[Earnest Sweat] Yeah, it’s a great point that the world kind of changed just overnight. You actually made me think of a side note, and I’ll answer your question. It made me think that there should be a podcast, maybe we could get it done, where the host talks to experts who all ultimately have some confidence in their industry knowledge, but not 100% confidence in their future predictions. The podcast could be called “Who the F Knows” — I’m not going to curse on here. But I think that concept or feeling just speaks to everyone right now. If you look at public markets, it’s similar to private markets. No one really, really knows.
So I would say that especially in those first couple of weeks, many venture capital firms, especially if you have legacy funds with a number of portfolio companies, focused on helping their current founders. How do we make sure that our current investments, get the funding and have the runway to make it through this experience? The other thing I’ve noticed, looking on Twitter or other blog posts, is that there is still a lot of capital out there looking to make investments. However, there is an adjustment period because of being sheltered in — there’s less travel, there’s less face to face meetings. So people are open for business. But if I’m honest, the bar has just been raised. If I’m a seed or pre-seed investor and I’m accustomed to writing a company a $250K to $1M check, it’s probably an adjustment period for an investor to get comfortable with not being able to meet the founder in person. Similarly for Series A and Series B investors, where they write larger checks you will see the same adjustment.
I think that what we’ll see and what I personally have been trying to figure out, as a historian of a startup ecosystem and the art and science of venture capital, is where are the underlying opportunities. I’ve always heard, that during recessions, the best companies are formed in those times. And if you look at each of the most recent recessions, 2000 and 2008, really what the prize investments displays is that investors made bets on the future next wave. Whether it was a technological shift or a behavioral shift. So if you look at the 2000 dot.com downturn, it was those companies that were able to go from on-premise to cloud operations. If you look at 2008, it was those companies that were able to use this new platform called a smartphone. And we’re able to build business models and technology off of that.
Personally, what I’ve been trying to do is continue to talk to companies and not be so reactionary and think about where are the trends that aren’t reactions to this pandemic, but actually trying to determine what are the underlying long term trends that are coming from this — because those are the companies that I would have invested in before this happened and definitely after this happened.
[CA] I have to say I love your podcast idea and I’m interested if you want to do that. Let’s take a look. We should pursue that, because I think there are so many industries and sectors that people have no clue what’s going on, what the developments are, you know, and having like a weekly podcast today focusing on the healthcare and other sectors would be really cool.
[ES] Yeah, it would be cool! And I think for me, I’ve been talking to a ton of people. This is the benefit of going to a school like Kellogg School of Management. I have a lot of friends now that are running business units at large companies. And I’ve been reaching out to them and talking to them about what use cases they are searching for technology companies to solve — for long term solutions. And I think during downturns like this, companies, even large companies will adopt technology faster for the right critical use case. And so, I’ve been trying to like do these quick sprints of talking to friends in different industries to then be able to synthesize what the underlying trends are.
[CA] Is that something you can share with us? So what are 1 or 2 key standout pain points that people are talking about across those industries?
[ES] Well, of course, I’m not going to give any secret sauce, but I don’t think any of this stuff that I’m going to share is not obvious. One sector is Telehealth. I’ve thought, do we need to go into the doctor’s office all the time? Is that the best use of time for both the provider or the patient? Maybe not for a lot of things. You can be diagnosed through secure, virtual sessions. And I think we’re going to see a lot more of that. And the actual hospitals and doctors offices are going to be used for critical kinds of data gathering or diagnosis. Another theme that we’ve observed is how the supply chain has been really impacted. From my experience working at Prologis Ventures, I continue to speak with supply chain operators, who see that this environment is even more of a reason to adopt automation and software that helps integrate automation a lot quicker because they can’t just depend on people. There are a lot of repetitive tasks that automation can take on to enable humans to work smarter, more efficiently. So that’s another thing that I’ve been following. Other questions I’m sorting in my head are: where does real estate go? Where does travel go next? Where do entertainment and live events go? So those are just some open-ended questions. I guess there’s a plug for if we ever do that podcast, “Who the F knows.”
[CA] I love it. A podcast plug for a future podcast! You know, I think one of the things that would be really relevant for people right now, especially entrepreneurs who are about to start a capital raising process or are even, you know, maybe even in the middle, but things have shifted for them. You’ve worked in really different structures of venture capital firms. You went from Prologis, as part of a much larger organization, to GreatPoint Ventures, that’s a more institutional fund that invests in a wide range of industries — from enterprise technology to looking at plant-based meat, but also looking at cancer diagnostics, looking at databases and increasing speed around that. So how should entrepreneurs that are looking to raise capital think about the different structures that exist in the VC world and which one may work better for some companies versus others?
[ES] The answer is usually “It depends.” So there’s not going to be a silver bullet because entrepreneurs are at different stages of their company or like you were mentioning, maybe a different point in fundraising. And so what I would say, given I’ve worked at a pre-seed investor at Backstage to, a corporate VC at Prologis, to now at a pure-play venture firm, with a series A and series B focus at GreatPoint Ventures. I think now more than ever, you need to, as an entrepreneur, do your homework of who would be the best investors for you. And I think understanding let’s start with the kind of best-case scenario. Let’s say your entrepreneur that has just fundraised and got seated in this game of musical chairs seat before the music stopped. It may be best for this founder to go back to your investors and get even more runway. And I think that’s important because we don’t know how long this lag will be. And when you’re going for your next fundraise, whenever that is, people are going to expect to see upward-moving metrics and so being able to show how you are able to navigate during the worst times is critical.
If you were about to start fundraising and are currently in the process, examining creative structures is always a good route. So if you already have insider investors, I would look to them for maybe a bridge investment because they know your vision and progress better than anyone else who’s just meeting you through a screen — not saying you won’t be able to accomplish pitching a new investor but its best to have as many interested parties to the table. Lastly, I’ve seen a lot of companies go through the fundraising process during this market and be able to raise despite the market. So looking at previous investors or investors that you’ve met before or previous attempts to fundraise, maybe they didn’t invest in you before, but maybe you can provide them with an update on your traction. That way you’re not starting from point zero.
[CA] Maybe for people who are less familiar with the differences between the various types of venture investors. What are the sort of the differences and the nuances between a corporate VC versus an institutional VC? Which organizations are better fits for founders and what are the pros and cons for each?
[ES] Yeah. Good question. They are very different. So most corporate VCs are strategic investors. That means those investors are not solely focused on financial gain. They’re looking for investments in companies that can either provide them insight on markets that they’re looking to enter or potential disruptive business models that could change their core business. So the value prop that the corporate can give is, “hey, we’re providing brand recognition and/or a commercial agreement.” For institutional funds, the focus is all financial. From this seat investors ask themselves, “do I believe that this company and its market create a billion dollar business?”
From sitting at both seats, I’ve seen the biggest differences. When you’re the lead investor at an institutional fund, you’re definitely working for the entrepreneur. Once you’ve both signed that term sheet, you are the employee of that entrepreneur and use your resources and experience to help those founders succeed at any cost. On the other hand, when I was a strategic investors and sat as a board observer, I was there to gain insights that would be beneficial to the parent company. When I had opportunities to provide insights to the company, I would help with navigating the parent company, leads to potential customers or assist in framing a distribution partnership. Those are two different roles.
[CA] I think highlighting those roles is more important now than ever, because if you’re going to get one shot at raising capital this year, you want to make sure it’s with the person that suits you best, that your stage of the company and whatever your goals are. Right. So I think your points are very valid.
[ES] I think what I’m about to say is an overarching generalization, but typically growth companies who have identified their core use case are good fits with strategic investors because they are mature companies that can provide that enterprise level of service. Whereas early stage companies are still trying to figure out. I’ve seen some earlier companies work with strategics and without a clear perspective of the value they will provide — this led to founding teams wasting a lot of time and resources. So it’s better to reach out to strategic investors when you company is more mature and has a clear idea of what its product-market fit is.
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