How VC and Startup Investment will look like in the Future

For many businesses across various industries, the pandemic has presented an unprecedented struggle. The pandemic has changed the outlook of many businesses.

Many have struggled to survive and for many that have survived, the outlook of their business is questionable and leaves many wondering what will happen next.

The Venture Capital and Startup industry is ever-evolving and changing rapidly, meaning that the uncertainty that was brought by the pandemic has not been a complete shock, but has expedited already existing shifts.

There are changes at play that may force the future VC and Startup investment to look quite different in the future. 

Work From Home is Changing Geographical Importance 

As the majority of the world has shifted to working remotely, from learning to investing, many of the untapped opportunities. Instead of having hot spots and hubs for startups and VC businesses, geography has started to play less and less of a role in building successful companies.

According to Joe Kaiser,

A couple of years ago, you had founders moving to the Bay Area to build amazing companies. Today’s [founders] are doing it from the towns where they grew up… We believe it is going to be an explosive and dispersed entrepreneurial movement across the U.S. I think we are going to see a really distributed entrepreneurial environment for years to come. 

Many experts and business owners agree on an idea: this shift to remote work is not going away when the pandemic does. Many people have found that working from home suits their lifestyles better and business owners have found it to be an effective way to run a company keeping the same performance.

Though many companies were ultimately forced to go remote against their will, they have adapted the approach, and now working from home is a suitable and feasible option for many companies and employees. 

With the increase of work from home culture comes an increase in the geographic spread of work hubs. According to Forbes, innovation has an impact in many more regions right now, making it possible for the Venture Capital ecosystem to see more and more interesting opportunities outside of the Bay Area and other traditional hot spots.

Post the COVID Pandemic, these trends are likely to continue.

As the pandemic has persisted, many industries have seen a drop in business and many have seen a surge. The healthcare industry is an area that has shown its importance and we will likely see an area of business that gains extensive interest. 

Forbes did an interview with George Bischof, Managing Director of Meritech Capital Partners, a late-stage venture capital firm with over $4 billion under management.

Bischof told Forbes that he is absolutely seeing the shift of startups from areas like the Bay Area to more spread out regions.

His takeaway is that the best companies will continue to succeed with the spread (even if at the time of the interview he was envisioning a pause on funding in a time of COVID).

The Investment Shift Increases 

The future of startups and venture capital is ever-changing. Limited Partnerships (LP) directly investing in startup funding has increased from between 40 and 60 deals each year in 2008-2011 to almost 100 a year in 2020.

This change in investment by LPs is likely going to continue and potentially increase more after the pandemic. These changes that we are seeing are likely to stay for a long time after the pandemic has ended. 

Other highlights of increased investment activity from non-VCs are: 

• Sovereign wealth fund investment activity has increased from $2 billion in 2010 to over $13 billion in 2016.
  
• Equity crowdfunding was estimated to reach $4 billion a year in the United States in 2016 with annual growth of a staggering 100%
  
• In 2017, money raised from ICO’s surpassed early-stage investing for the first time ever.
  
• The number of corporates investing in startups has doubled in number from 2012 to 2016, now accounting for almost 25% of the United States venture deal participation. 
  
• Lastly, over $1 billion was raised by projects alone in December 2017. 

Long story short, there is more funding coming from more sources for startups now than there used to be, meaning there are more startups, causing there to be more competition.

To succeed in the venture capital industry now, you have to be prepared to earn your way to the top and succeed among many competitors. According to a Preqin survey done in 2017, 49% of Venture Capital managers reported an increased level of competition for their deals.

It is no longer a given conclusion that Venture Capital will easily find investment solicitations. 

The pandemic has slowed down the investments and success of many startup teams, but as these trends continue, it should be a similar situation after the pandemic.

Raising funds that lead to survival in success in the startup and venture capital industry are becoming more common, meaning it is possible for more companies to access capital. Without acknowledging this, it could be detrimental to the success of a company.

According to Pitchbook, United States VC funds have raised investments near $70 billion in 2020, surpassing a 2018 record, despite the odds of a pandemic-struck economy. This is only expected to increase more in the future, meaning institutional investors, VCs, are defending their roles in the future of startups. 

This is also the continuation of a trend that started to show in 2019, with institutional investors wanted to be part of startup development since their early stages. Only in the first half of 2019 more than $20B of capital was introduced to extend seed-stage portfolio investments in new ventures.

More Diversity in the VC world?

Included in the overall growth and success of startups, are women. According to Forbes, women-only teams historically raised around 2% of all venture capital while all-male teams raised a staggering 89% of it.

On top of that, only 8% of partners at top firms were women. New trends show women climbing the ladder with women funding over 20% of all new micro funds, that being funds under $100 million.

This trend is expected to continue to grow, with women holding more top positions at some of the best firms and increasing their raising in funds and fund sizes. 

While the number of senior-level women in Venture Capital has grown significantly over the past year, it is important to note that nearly 75% of major firms still do not have any women as senior partners. 

Women are not the only people who represent a fraction of senior Venture Capital leaders. Venture Capital is one of many industries that struggles with a lack of diversity.

A recent study done by The Journal found that 70% of venture capital firms’ employees are white. Additionally, a staggering proportion of venture dollars is invested in companies that are run by white males. 

We must address the problems that have historically hindered equality in American institutions. Lack of access to capital for Black people is an assuredly systemic problem in America and it is echoed in the VC space.

Last year at M Accelerator we hosted an event to stimulate dialogue within the fast-growing Los Angeles ecosystem in order to generate change.
We assembled a panel from the investment and VC space in Los Angeles.

[LIVE] Diversity and Startup Investment

Keep an eye on the data

Data science and automation seat next to analysts. For example, Social Capital started “capital as a service,” an investment automation process that analyzed 3,000 pitch decks and takes decisions.

Companies apply online and move forward through the selection process without human intervention. On the other side, a platform evaluates investment opportunities and returns.

Areas of Interest for Startups 

The pandemic has completely shifted business plans and unfortunately put some areas in a tough spot or even forced them to close. As startups move forward, it is to be expected that some areas such as healthcare and medicine will boom while others may not bounce back.

The pandemic has highlighted a need for improvement in many industries, leaving holes for startups to fill. 

Bischof told Forbes that he believes healthcare is an area that is requiring a huge need for improvement, especially in areas such as telehealth and contactless health care.

Bischof also mentions that investment requires a long-term horizon and we must realize that at some point, the pandemic will be behind us and many will want to live life as normal and go back to old investment patterns.

That being said, the holes in the markets that the pandemic has exposed are in dire need of being filled and it is reasonable to expect that to be the main focus for a significant amount of time. New ventures are beginning to design new investment and marketing plans to address these holes that have been exposed. 

In order to assess this problem, top firms and top investors must first recognize that the problem exists. According to Entreprenuer.com, many top investors believe women entrepreneurs and entrepreneurs of color are getting enough funding already.

In contrast to the fact that multicultural and women-owned businesses are being capitalized at 80% less than business overall, many firms made up of white men do not see a problem. 

The pandemic has bridged an even greater gap between the top 1% and the rest of the population, meaning it might be some time until we see equality within venture capital and startups.

If big firms refuse to recognize the inequality, then it is fair to say they may face a struggle in the future.

Conclusion

Though the pandemic has presented an unprecedented problem across all areas of business, the startup founders and venture capitalists, and other fund managers have the potential to make a great shift in their business models.

As we have stated, the pandemic showed holes in sectors we did not know were there, leaving a huge opportunity to build better business models. 

Aside from that, the increase in investment sources and the new potential for geographic spread proves a brand new potential for the startup and venture capital market after the pandemic.

Spreading out across the country away from hot spot hubs like the Bay Area presents a new potential of inclusion and growth across the industry and across the country.

The spread of startups and a new form of investments also presents opportunities for women and people of color-led teams to succeed.

An increased geographical spread leaves opportunities for startups to be created in towns where founders are from, allowing them to build from their own communities rather than making a name for themselves in the Bay Area or other hubs, where there is already an immense amount of competition. 

All in all, there are many more opportunities in the startup and VCs space compared to other industries. Luckily, the pandemic has shown a new way to succeed and there are more paths available for more individuals. Startups have always been able to adapt and the future will be no different.

Adaptation and innovation are required to succeed in any industry and they should be at the core of each startup business.