VCs Aren't Changing Their Ways of Working During Covid
Natasha Mascarenhas of TechCrunch highlighted our Managing Partner Collin Gutman’s thoughts on how VCs may (or may not) change their habits due to Covid this week.
https://techcrunch.com/2020/06/15/investors-based-in-san-francisco-thats-so-2019/
We felt that it would be reasonable to provide an expanded perspective here so that entrepreneurs can understand what SaaS Ventures is seeing in its partner ecosystem.
I think the expectation has been that VCs would take two actions in response to Covid/working from home:
Expand their geographic focus — since you could be taking calls from entrepreneurs anywhere in the country now with equal focus
Expand round sizes to ensure that companies have sufficient runway to survive the likely coming downturn
We have seen neither of these trends happen.
VCs have not expanded their geographic focus both because they are not truly switching to a WFH model and because their respective networks would make it extremely difficult. To the first point, we have seen VCs in reopening states among the most active in meeting entrepreneurs face to face. Many of our fund partners have discussed partner meetings taking place “in person, but socially distanced in a conference room” while others have expressed that “we can’t start a decade long partnership with an entrepreneur we’ve never met.” Accordingly, we’ve seen many VCs take in person meetings — in outdoor, distanced settings, even through Covid. So much of the way venture has been done traditionally depends on in-person interaction that the industry cannot and will not pivot on a dime. To the point about networks, VCs simply aren’t equipped to go hunting in new markets. VCs typically have been able to raise money on a specific thesis — that their focus and network will allow them to participate in elite deals. They’ve grown their network over years of investing accordingly. So for a fund traditionally focused on the Bay Area and built on founder referrals to find the next hot deal, or for a fund that leverages YC and other accelerators for dealflow, it’s nearly impossible for them to suddenly pivot to discovering the hottest deals in Nebraska. Much remains business as usual in VC.
On the second topic regarding round sizes — we’ve actually seen the reverse — a compression of round sizes. While the Bessemer Cloud Index and public markets remain at all-time highs, early stage venture capital valuations are absolutely feeling the Covid and macroeconomic pinch, and the revenue multiples on investment opportunities we’ve seen over the past 3 months have steadily declined. With VCs pushing on price, entrepreneurs are pushing on round size, and we’re finding smaller rounds than we’ve seen for the past 3–5 years, but at lower valuations. This is an environment that will likely yield some outsized returns for investors — should they win a spot in the very best companies.