In moments of uncertainty, it helps to gather a cumulative idea of how VCs at top performing funds around the world are thinking.
We reached out directly to 90 venture capital partners at prominent funds in the Kauffman Fellows network to get a gauge for investing and industry sentiments. Of those surveyed:
- 40% are actively raising a new fund
- 46% have raised a new fund in the past 12 months
In our sentiment analysis, we learned about how funds are (or aren’t) deploying capital, their perceptions of raising more capital, whether or not they’re shifting their investment focus, how investors are supporting their portfolio companies, and more.
On Capital Deployment
Of the investors surveyed, we asked about capital deployment and only gave the option of slowing down or speeding up. Using this methodology, we found that the majority (75%) expect to slow down capital deployment, whereas the remaining 25% expect to increase.
On Raising Capital From LPs
46% have raised a new fund in the last 12 months, and 54% have not.
The vast majority of VCs (85%) think it will be harder to raise capital from LPs. 15% said things will remain relatively consistent with the past.
43% of investors will allocate more follow-on investments, whereas 57% will stay the course with their existing follow-on strategy.
On Investor Sectors
When asked whether or not the VC is planning to shift his or her focus to a new sector(s) for investment during the COVID uncertainty, only 16% of respondents said yes.
We also asked what company sector(s) will likely have difficulty raising capital in an economically depressed environment like a recession, and the following categories came up most often:
- Real Estate Tech
- Oil Focused
- Non-essential SaaS products
- SMB focused
- Consumer discretionary and DTC e-commerce
- Brick and mortar
A common thread throughout all the responses is that companies that rely on discretionary consumer income are most likely to be hit.
Specifically related to COVID, many companies that rely on offline transactions or in-person traffic are going to be in very difficult positions.
“In this particular environment, unlike other recessions,non-technology-enabled companies eg bricks & mortar will experience the hardest time raising,” says one respondent.
Another noted, “Companies that were struggling previously [are most likely to have difficulty]. Additionally, those who depend on travel and in-person services, as well as retail, travel, events, restaurants, and so on.”
“It’s not about the recession for me, it’s about COVID. So companies that have significant offline components will be very difficult for the next 18 months,” says another participant.
Companies with high burn rates are also in a dangerous position, particularly those whose business models are missing out on the opportunities imposed by stay-at-home mandates. Additionally, business models tethered to longer cycles are endangered.
“I believe it’s less sector-specific, and more P&L specific. Companies that are more than 24 months away from breakeven will struggle to raise capital, I fear,” says one investor.
“Capital intensive businesses [are most threatened], especially those who run lease arbitrages such as. co-working/co-living/alternative accommodations” notes a respondent.
“Capital intensive companies and those not focused on industry sectors driven by the virtual/remote access/autonomous “new normal” we are all facing,” claims another.
“[The most at risk are likely] the wantrepreneurs and vanity startups, beauty and fashion sectors, and deep science/tech outside of healthcare and space [due to their long cycles.]”
However, no sector is immune from hardship, and many venture capitalists claim it’s going to come down to the entrepreneurs and execution.
As one respondent poetically puts it, “everyone who is not knocking the cover off the ball” is in trouble.
“Any company needs to articulate & visualize a compelling growth & value creation opportunity. In challenged sectors, this is going to require even stronger entrepreneurs and even better preparation.”
On Supporting Their Portfolios – Money, Mentorship, and Tough Conversations
While an incredible amount of responsibility falls on each individual entrepreneur, many venture capitalists feel a deep responsibility to support their current portfolio companies in a variety of ways.
The following general sentiments were picked up in the survey:
Strategy & Financial Planning:
P&L reviews, runway modeling and cost management, HR and headcount reviews, restructuring, customer introductions, scenario planning, follow-ons, providing bridges, and working capital lines
Many VCs also want to help startups navigate the many new government stimulus and support packages such as Cares Act loans and PPP support.
“We are rolling up our sleeves and supporting each company as needed,” notes one respondent. “Help raising, refining/pivoting strategy, business development, working with the SBA to change the terms of the PPP to include venture-backed companies, promoting their offerings, and so on”
“We are supporting with financial planning, additional capital, advice regarding federal loan programs, assistance with governance in times of distress, emotional and moral support.”
“We created a task force and repurposed the entire team to support our portfolio companies,” says another VC. “[We’re planning for] lots of 1-on-1 calls, working on budgets, cuts, HR, strategy, new markets, everything.”
“[We are providing] bridge loans, support for PPP loan applications (where applicable), support with Comms around RIFs [reduction in force], and RIF planning from a legal perspective,” lists another VC.
“We negotiated over $1m in AWS credits for portfolio, $500k stripe credits, help with HR staff reductions, ran two webinars for support, and provided bridges in select performing companies which are disproportionately affected,” comments a participant.
Communication & Support:
CEO/COO/CFO support groups, mental and emotional support, Coaching and strategic planning, weekly calls, constant communication, and more board support.
Many investors feel that the best way to support their portfolio companies is to provide meaningful engagements and keep communication channels as open as possible.
“[We aim to provide support to portfolio companies] through our community platform,” says one VC. “[There is] lots of information being shared between companies. [We want to help] support placing talent that is being let go. [We must also] push companies to make hard decisions that will be necessary to survive.”
“We formed peer groups of CFOs/ COOs/CEOs to share knowledge,” claims one VC. “Helping them as a board member with re-budgeting, and helping them raise inside rounds or external rounds.”
“[We aim to provide support to portfolio companies] by giving them direct and sometimes difficult advice, and by sharing with them that we’ve been through it, and we understand how hard this is.”
“We are doubling down on bespoke rather than blanket advice,” comments another participant. “We’re also doing a lot of community connecting – launcher 1-on- marching and mentorship across the portfolio. Spending a lot of time on talent and people issues. Launching a mental health and wellness task force.”
“I would hope that GPs’ support is equal both in downturns and positive markets. I think there should be more mentorship support in [the] form of check-ins and discussions especially for those experiencing their first crisis,” says one investor.
Whether you’re an investor or entrepreneur, the uncertain times ahead can be tough to process emotionally. Concern, stress, worry, and exhaustion are among the most common emotions participants noted, but connecting them all is a sense of community.
Dozens of venture capitalists spoke about how each day feels like a rollercoaster of emotional ups and downs, where tough conversations with portfolio companies have to happen every day. Instead of board meetings every six weeks, some VCs are having to do them once a week.
Frayed, we believe, is a word that encapsulates a majority of the sentiments of the respondents.
However, you may find solace that many of your colleagues share the same feelings of anxiety, yet are energized and confident in the future of the world.
“This is what I was waiting for,” says one VC. “Venture capital is part of the solution to this perfect storm, and backing our founders is how this world will find a new, healthier, more sustainable equilibrium. I’m excited to do our part backing innovators making the world a better place.”
And the above VC isn’t alone in their optimism.
“I feel highly motivated with the desire to find opportunities that always present themselves in times of uncertainty,” notes another.
For many other VCs in our survey, this recession isn’t their first rodeo, and they’re steering their battle-tested resolve for another round. We implore our readers to consider the often overused but highly applicable expression, smooth seas never made a skilled sailor. It’s moments like the ones ahead that build the character necessary to underpin a long and successful career in one of the most dynamic financial markets in the world.