Few corners of society have been immune to COVID-19's effects. As the pandemic spread across continents, nationally imposed lockdowns and social distancing measures forced businesses to adapt their offerings or shutter their operations. And the venture capital (VC) landscape has been no exception.
The pandemic has certainly presented VCs with fresh challenges. Fortunately, while it's true that investment activity slowed in the initial period of paralysis earlier this year, fears about a devastating market downturn have largely proven to be misplaced.
Indeed, the pace and size of equity investments has remained relatively steady, with new data showing that funds raised in 2020 have already surpassed the total in 2019. According to a report from PitchBook and the National Venture Capital Association, US venture capital funds closing this year raised $56.6 billion as of September 30. This is more than the $54.9 billion raised during 2019 and just shy of 2018's record fundraising total of $68.1 billion.
Clearly, the venture capital market has remained healthy throughout the crisis, but that is not to say that the pandemic hasn't reshaped the VC landscape. With this in mind, what trends can startups and investors expect to see going forward?
A Shift in Investor Focus
Businesses have faced the need to find new and inventive ways to survive the "new normal." For many companies, this means digitizing existing processes and relying heavily on cloud-based services to enable workers to access corporate networks from their homes.
But this presents myriad new problems for businesses. While the pandemic provides vast opportunities for digital transformation, it unfortunately creates the perfect storm for data breaches and hackers, too. Social distancing restrictions have forced firms to abandon the protections in the office in favor of enabling employees to work from home, where they might not have the same robust levels of security.
Of course, VCs have kept their ears to the ground and are looking to cybersecurity and artificial intelligence (AI) startups as a means to mitigate these new vulnerabilities.
Cybersecurity spending is forecast to grow approximately 9% a year from 2021 to 2024, according to Gartner, as businesses invest more heavily in identifying and quickly responding to threats. While large corporations have traditionally been responsible for huge amounts of private data that make cybersecurity a priority (banks and insurance firms, among others), the new virtual backdrop across all industries means that businesses of all shapes and sizes are looking to build the capabilities and defenses needed to keep malicious actors at bay.
What does this mean for the startup landscape? In short, VCs will look to business-to-business (B2B) solutions that can offer enhanced data analytics to enable businesses to navigate the increasingly blurred lines between the digital and physical worlds. Cloud-based cybersecurity services that can scale up defenses around remote workers, without the need to physically install hardware on-premises, are key targets — as will artificial intelligence (AI)-enabled solutions that seek out threats and stop malicious activity before it occurs.
Indeed, businesses offering the promise of profitability even in the wake of chaos and market disruption will always be the logical choice for VCs. But with clear demand for solutions to resolve the looming threat that cyberattacks pose in the long-term, this is the case more than ever. And given that only 20% of companies are confident in their ability to fend off ransomware, VCs are likely to pursue cybersecurity with greater urgency going forward.
Remote Working: Here to Stay?
It's not just cybersecurity that is a threat due to the large-scale switch to working from home; this change has also posed issues for VCs and companies looking for capital in a more general sense. At the start of the pandemic, investors were prompted to complete their tasks remotely in lieu of face-to-face meetings — conducting everything from valuations to offering advice to founders using virtual channels.
Fortunately, this has largely been a success, and remote working has not deterred investors; rather, the disruption of core working processes produced adjustments. Maintaining connectedness and ensuring the continuity of critical activities encouraged investors to enlist videoconferencing and productivity software that allows them to seamlessly assess their investment pipeline, conduct discussions with founders, and deliver effective mentoring.
Not meeting people in person is difficult, yet it's likely our reality for the long haul. Many VCs will lay the groundwork for more effective ways to work in the future — whether it's determining the best frequency for interactions, the most effective methods of providing leadership and execution support, or more generally, the most appropriate ways of building critical relationships in this new digital age.
Is COVID-19 Changing Investor Behavior?
Another qualm for fledgling companies is the potential for adverse changes to dreaded VC term sheets. Although there has been a shift over the last decade to cleaner, more "founder-friendly" terms, startups seeking investment have understandably feared the return of less-than-favorable legal agreements as a result of the pandemic.
To an extent, founders should expect some readjustments from VCs as a result of COVID-19, but ultimately, companies shouldn't worry too much about the rise of aggressive terms. In the long run, creating unyielding terms will do little more than damage the reputation of VCs.
In my experience, founders know their worth; when faced with inequitable deals, they will simply walk and find a new partner. Ideally, one that is able to help them de-risk their business rather than merely point out those risks.
One trend that is likely to continue is the prioritization of late-stage over early-stage deals — a pattern that has, admittedly, been accelerated by the pandemic rather than prompted by the crisis. I predict that due to the higher stakes involved, the VC community will continue to engage mostly at the latter stages, as they generally lack the technical capability to screen before there is a product and market traction.
Generally speaking, though, appetite among investors remains strong despite the ongoing unrest. VCs will continue to consider and invest in a variety of interesting opportunities, allowing many early-stage companies to thrive in the process.