In 2020, venture capital (VC) firms and investors were hit by some of the most substantial and unprecedented changes they’ve had to contend with yet: widespread market uncertainty, fewer funding rounds and less face-to-face interaction with clients. The sum of all these conditions could have made quality investment difficult or even impracticable, yet digital technology and culture change have proven, once again, that the restrictions of yesteryear need not interrupt modern business.
Still, the challenge has been omnipresent and a generally conservative attitude to unique business ventures took hold. McKinsey & Co a significant drop in overall executive commitment towards innovation at the height of the crisis (23 percentage points (pp), down 32pp from its pre-crisis level of 55pp), a reduction that it doesn’t expect to fully recover until after pandemic conditions have fully dissipated. Furthermore, when the article was originally published in June 2020, 90% of surveyed executives predicted that COVID-19 would change business norms significantly for the next five years. Although it’s still too early to tell the long-term effects, the short-term implications of this prediction couldn’t ring more true.
Building bridges with tech
When considering the primary factors that have enabled investment activity to carry on relatively unimpeded, the ubiquity and importance of video conferencing software cannot be overstated. Matthew Koertge, Managing Director at Telstra Ventures, says that, although such tech was already being deployed at his VC firm, the pandemic put its utility in sharper focus. “Even with the pandemic ongoing, we have still been able to complete six new investments and many follow-on investments in our existing portfolio. We even made it fun by organising virtual lunches and gin master classes as a way to break the monotony of Zoom pitches.”
In addition, Manuel Silva Martínez, General Partner at Mouro Capital, puts forward that investment firms have generally undergone the same operational challenges as their portfolio companies, including getting used to remote working, “not only making sure that everyone had good equipment at home, but also making sure that our processes, culture, and our raison d'etre were solid, grounded and resilient. A lot of VCs thought they were very well-oiled machines, but 2020 has tested that and opened a lot of eyes.”
The shared experience of a pandemic, then, has served to foster a lot of empathy between VCs and their clients. The lack of travel for in-person meetings has also meant that more online pitches with prospect companies from around the world can take place back-to-back. However, Martínez goes one step further and suggests that we could actually be witnessing the disappearance of parochial investment opportunities. In this new vision, there would be no separate ‘London scene’ or ‘San Francisco scene’, “which is great news for smaller ecosystems traditionally underserved by capital, but it will make VC competition much more fierce.”
There is a growing sense that modern ‘investment’ should mean more than just providing capital (see our profile on , pg.10 to 23). Time, particularly for startups, can be as valuable as money in the investment cycle, and VC recognition of this has made it emblematic of a fundamental culture shift. Steve MacDonald, angel investor and founder of MacDonald Ventures, states that this is an approach he has always championed, “For years VCs have preached about taking ‘smart’ money. Well, if we aren’t actively sharing our knowledge how can that money be ‘smart?’” While bearing in mind that the density and frequency of advice will need to be measured against the company’s executive experience level, the benefits of investor counsel can manifest itself in many ways:
- Instruction on understanding KPIs and OKRs
- Customer introductions
- Discussion around finance options,
- Guidance on how to structure deals
- Critiquing new products and advising launches
The world of investment is becoming simultaneously smaller and larger than before, and attitudes within the sector are noticeably changing. MacDonald notes two primary shifts: 1) Greater emphasis on real-time, data-rich communications to enhance mentoring; and 2) A willingness to discuss ‘difficult’ topics. “Attention to cash flow and profitability has been a big change,” he suggests. “Conversations regarding financial prudence have taken on new meaning and the entrepreneurs have been much more receptive to these hard conversations.” Martínez concurs, claiming that the market has validated a “back-to-basics” approach to mentoring focused on growth and profitability. Interestingly, he adds that entrepreneurs are even demonstrating a proclivity to “share their state of mind and look for comfort” from investors. This suggests that an element of distance may, paradoxically, have enabled people to become closer.
Building on MacDonald’s first point, Koertge adds that accelerated digital transformation across the board has served to ramp up the quantity of data produced and managed by enterprises. Therefore, internal investment in consumer tech, AI (artificial intelligence) and cybersecurity will be essential. “Making sense of all this new data to deliver real-time, actionable insights will be a key theme in 2021. Telstra decided a number of years ago to supplement our investment process with data science. This has resulted in several recent investments that we otherwise would not have identified.”
Steve MacDonald predicts...financial services in 2021
1. Market consolidation will continue as the previous cohort of startups reach maturity like Plaid and Credit Karma.
2. Legacy companies’ acquisitions will accelerate.
3. New niche unicorns like Robinhood and Brex will be minted.
4. The trillions of paper dollars will continue to be digitised.
5. New niche players will evolve to digitize those dollars.
6. More anti-fraud solutions will proliferate with that digitisation.
7. AI will be core to every new breakout fintech company.
Reading the market
“Inevitably, the volume and value of deals has been negatively impacted by the pandemic, at least at the beginning,” continues Koertge. “But there have been signs of renewed activity in recent months.” This begs the question: what kind of company makes an attractive prospect in the post-COVID environment? Technology is a core part of the finance market, but it’s often not sufficient for differentiation between investment options. “Cool new technology doesn’t automatically guarantee a transformational impact. Telstra Ventures spends a lot of time understanding the drivers of a market, who the players are and how innovation and technology are shaping a market.” MacDonald agrees, stating that finding companies and/or individuals with “deep domain expertise” cannot be overstated. Martínez, while not refuting this assertion, accentuates Koertge’s other point that the contemporary market requires “contextual awareness” of market trends, particularly with regards to forecasting: “Most of the transformative power of fintech comes from a combination of business model reinvention, regulatory innovation and changes in market dynamics. Knowing how to read the zeitgeist will be important for gaining an advantage.”
More than any single company or archetype for success, the changes to market dynamics in 2020 have had a profound effect on investment’s future. With what Martínez calls the “democracy of the digital plane” breaking down regional barriers and broadening the VC-entrepreneur relationship, the years beyond 2021 are set to be a very exciting time. Digital transformation has set the stage and now an ongoing culture shift among VCs is guiding the industry’s new direction.
“My role at Telstra Ventures includes every aspect of running our firm, including managing investments, our investment process, leading our team, working with our clients and raising capital. We started Telstra Ventures in 2011 and we are one of Australia’s largest VC firms with more than US$565m under management.”
“I have been investing in fintech since the late 2000s, primarily on behalf of Spanish banks. Mouro Capital is an early growth stage VC focused primarily in fintech, investing across Europe and the Americas with nearly 40 invested companies so far.”
“I graduated college when few people had computers and students still went to computer labs. In 1999, when I was 28, I left my job at a publicly traded mail order pharmacy company and started my first of several healthcare software companies focused on digitising business processes and improving the customer experience, two of which sold for a combined $400m.
“Prior to my last exit in 2017, I started angel investing. In 2020, with more than 100 early stage investments, I decided to formalise my ‘hobby’ by founding MacDonald Ventures.”