By Fountech Ventures
The coronavirus pandemic has brought about a paradigm shift for many industries. As the virus swept the globe, its effects have been felt across all sectors of society, and the world of venture capital has not been immune.
Facing an array of unknowns, founders have been forced to find novel ways to adjust. For many, this involved changing business strategies, or pivoting their offering to fit the “new normal”. But for others, the pandemic has incited a well of new opportunities — particularly in the deep tech space.
In our experience here at Fountech Ventures, there has been no substantive reduction in artificial intelligence (AI) startups attempting to launch since the onset of the pandemic. If anything, COVID has sprung a myriad of new businesses into existence; from powering remote learning to digital banking, AI-powered solutions have never been in such high demand.
More generally, according to the US Census Bureau applications to start new businesses across the US are up 19% compared to the previous year. Meanwhile, a separate report has concluded that more than half (52%) of startups in the US have actually been positively impacted by the pandemic.
When it comes to investing in this environment, there are positive indications that VCs are keen to deploy capital and support entrepreneurs. We need only to look to recent data for confirmation: according to PitchBook, funds raised in 2020 have already surpassed the total in 2019, with VCs raising $56.6 billion as of September 30.
Sector focus during the pandemic
Here Fountech Ventures, this has certainly been the case, and our focus on deep tech companies having mitigated many of the challenges posed by COVID-19. But given the current situation, startups should expect VCs to look increasingly to pandemic-proof business models and solutions to help us live alongside the virus.
In particular, we have found that demand for technologies that look to have an impact by building new infrastructures is exploding, driven by the increasing availability of capital and reducing tech barriers to entry. However, these businesses have always been fertile ground for investment, and the virus seems only to have accelerated the trend.
Mitigating risk and remote investment
But this is not to say that VCs haven’t faced some difficulties in recent months, and investors have been exerting some caution.
One change that we have seen is that VCs appear to be de-risking their investments by moving further down the line in search of more advanced businesses. This is a longstanding trend which COVID seems only to have exacerbated; with so many unknowns at stake, VCs will naturally be more hesitant when it comes to investing in early-stage startups.
In fact, pre-seeds today are looking more like the seed raises of a few years back. Based on recent investor research that Fountech Ventures undertook across 100 or so VCs promoting themselves as early-stage investors, it transpired that the vast majority don’t actually invest at the idea stage, which is our sweet spot.
We can also expect investors to choose any additions to their portfolio more strategically. To ensure that chosen startups align with their risk profile, as well as their return on investment (ROI) timeframe and exit strategy, investors will no doubt be making certain adjustments to their screening process.
How have VCs adapted to remote working?
From a mechanical standpoint, most investors have adapted comfortably to remote working. And as restrictions continue, videoconferencing tools and virtual mentoring sessions are likely to feature strongly in the post-COVID world.
But not meeting people is difficult, and many will agree that this takes much of the joy out of business. For better or for worse, VCs and founders alike will need to become accustomed to remote deal-making and online mentorship, and find ways to build successful businesses and relationships in a digital format.
There is still much to be understood about the ripple effects of the pandemic, and how it will ultimately shift the VC space in the longer-term. What we can be certain of, however, is that truly pioneering startups will be in a good position to secure funding even in unprecedented times like these. Entrepreneurs should therefore think carefully about what an investor can bring to the table, and look for mentors able to nurture their business from the early-stages of its journey.
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