The change the pandemic brought to the investment relationship
Fourteen years into my journey at Elron and just having been appointed CEO in March, I had my plans for the future to come. Funny enough and plans aside the first coronavirus lockdown kicked in.
The year 2020 has brought with it an unforeseeable torrent of disruption, affecting the lives of every human being on the planet. As unwelcome as it often is, change nevertheless drives growth. From the embers of the pre-COVID world begins to emerge the future that investors have been speculating about and believing in for years. The advent of this disruption enabled the market to realize that it had underappreciated the total available market for technology companies, as well as the exponential scalability of these companies as our lives became more digital than ever before.
The rise of COVID, the subsequent lockdowns, and the worldwide transformation it caused, initially shocked us. Incredibly, the venture market and the capital market rebounded quickly, made apparent by the fact that we witnessed a high volume of fundraising this year. Numbers and statistics were analyzed by my colleagues over the last couple of days showing that investments in tech reached record high levels in 2020.
It is clear that the influx in the usage of technology has made a significant impact on the VC industry and has also changed the perspective of early-stage investors with regards to how the investment relationship should be operated. COVID has accelerated a transformative shift in the investment stages VC firms previously operated in. For example, the Seed phase has been expanding to cover longer periods in early-stage company development, while Series A funding rounds have begun to look more like Series B in terms of increased valuation and size. This shift involves the merging of certain stages and has ultimately divided venture capital into pre- and post-product market fit while the old distinction between Seed, A, B etc, is no longer relevant.
We at Elron, as early-stage investors for decades now, have recalculated our position within the value chain in light of the new money that flooded the public and the VC markets and reached the conclusion that the notorious “Dry Powder” currently available is mainly seeking such post-PMF ventures, which carry much less risk. Hence, our long-lasting early stage approach, of actually “breathing” the same air as our ventures, mixed with our longer term vision, was instilled with new meaning. We decided not to keep our funds tight, rather actually the opposite. With our esteemed partners, we have backed and provided our early-stage ventures with the necessary oxygen (AKA $) in order to cross the bridge into the safer “post-PMF” territory, we worked to readjust burn rates, marketing and sales methods (no more field sales unfortunately), apply for government grants, keep employees focused on long term goals, rapidly mature their products and support their thought process. The most encouraging phenomenon was observing our portfolio companies’ CEO’s back each other with valuable advice.
With the appearance and dissemination of the coveted vaccine, we can now look ahead and understand the changes this pandemic has brought about for the VC market. For instance, the rise of SPACs, as an additional funding alternative, which is a simpler, and faster way for companies to go public, has changed the investment game, as they represent a low-risk entry to major initial offerings. This is a notable modification which is impacting the entire VC industry as the number of firms that use this strategy as an alternative IPO route rises, helping them reach liquidity and gain access to capital. This means, again, more and more post-PMF funding. Will the flow of funds find its way to early-stage ventures at the same pace in 2021? We will have to wait and see.
It is my long-standing belief that early-stage venture capitalists have the potential to make the most significant impact (and of course returns) as investors. Pre-PMF investors are able to bring their beliefs about value creation to fruition by partnering with founders to help realize their potential. The shift in the VC industry implies, in part, that the overall relationship between venture capitalists and entrepreneurs will be characterized by greater involvement overall. As for Elron&RDC, our role is as an early-stage investor, and we specialize in pre-PMF investing. For those startups that find themselves in the pre-PMF position, we are here for you.
Happy, healthy and successful 2021 for all of you.