SALT Talks-OurCrowd Pandemic Venture Investment Series (Part 1)
Watch the full episode here.
Despite the economic fallout from the coronavirus pandemic, venture capital is well placed to thrive as the world becomes increasingly digital and demands innovative solutions, according to one veteran Silicon Valley investor. Unlike previous economic crises, the pandemic offers a chance for venture capital to respond directly to the world’s most pressing needs, from healthcare to online banking to secure communications.
The crisis “will be different because of the importance of venture capital,” said Steve Krausz, general partner at U.S. Venture Partners, a Menlo Park-based VC firm that backed companies like Checkpoint Software Technologies Ltd. and Box Inc. “The digitalization of the world economy is going to be enormous.”
Even before Covid-19, many VC-backed industries, including cloud computing, financial technology, and digital health, were growing, and driving some of the most dynamic changes in the economy. The virus, along with stay-at-home orders and social distancing requirements, has boosted those shifts, Krausz said, with consumers, businesses and healthcare providers relying even more on digital and online tools.
“It has been playing on trends that were already underway,” Krausz told Alec Ellison, U.S. chairman of OurCrowd, in an interview in the SALT Talks-OurCrowd Pandemic Venture Investment Series Oct 29. Krausz does not see any turning back, even after the pandemic fades. Companies are now more aware than ever of the need to harness technology, and are increasingly demanding more innovative solutions, he said.
“It feels like this time we’re dealing with a shift in the economy,” Krausz said. “What has changed is the attitude of company management, about how quickly they have to make the transformation to a more digital footprint across the globe. That’s a fundamental shift.”
In the medical sector, there are signs of quicker and more efficient patient trials and regulatory approvals, which could pave the way for more venture investments.
“A lot of firms have avoided the area because of regulatory clearance,” Ellison said. “But the pandemic is clearly accelerating elements of the speed of approval.”
Krausz sees this as an ongoing trend as the data and analytics systems to track trials and other approval processes improve.
“There is so much pressure to improve that cycle, I don’t think we are going to go back,” he said.
The VC industry itself, raising $257 billion in 2019, is also much bigger and more geographically spread out than it was during other other recent economic crises, like the dot-com bubble of the early 2000s and the 2008 global financial crisis, when the sector took big hits. There are more sources of money, with private equity firms, large multinational companies and public-private partnerships playing a growing role in venture funding, he said. Historically-low interest rates and government economic stimulus measures – which will likely continue for a couple more years – also create a lucrative investment atmosphere, he said.
“There is so much capital now that’s available,” he said. This increased liquidity is also raising valuations of start-ups, he said, with later-stage enterprises seeing their values double over the last few years, and early-stage companies going up about 50%.
“Doubling sounds like a lot until you look at Amazon and Apple,” Ellison pointed out, referring to record-high public markets, which startup valuations often mimic.
While large technology companies, like Facebook, Apple and Microsoft, still dominate, Krausz insists there is always room for new players.
“It is a winner take all economy right now but it’s also one in which innovation is happening all the time so you can knock down the big dogs in any sector,” he said. “I won’t say easily, but you can do it.”
The pandemic actually offers opportunities, he said, rather than simply being a period to try to survive.
“In past crises, most of us burrowed down and tried to extend the life of the capital that we had invested, but we didn’t change strategies dramatically,” Krausz said. “This time I think the strategies are changing quite a bit.”
For example, U.S. Venture Partners has increased the share of medical-related companies in its portfolio, and made some new investments in cyber security, which has become increasingly important as more data moves online. “That’s been an explosion since the pandemic hit,” he said.
But there have also been some challenges and slowdowns for his firm and the industry, especially when it comes to the field of enterprise software, or programs designed for companies, in sectors that have suffered downturns, like retail, travel, and advertising, he said.
“Part of it is because retailers have had less budget,” he said. For Krausz, the lack of in-person meetings when deciding what startups to fund are also a hurdle. This has led his firm to mainly stick to funding entrepreneurs they have worked with before or know well.
“I would say that is an area we feel very strongly about, in terms of really wanting to sit down and getting to know our teams and their ability to hire teams,” he said. “Hiring a full management team over Zoom, people are still people, it’s really tough”
Overall, Krausz is optimistic, and confident that investors will only increase their interest in innovative investments, even during the pandemic, as the world rapidly changes, with VCs playing a growing role in fields like medical care, cyber security and even space exploration.
“Crises like these really shake the industry to its core, and prove to be a real test of the teams that we invest in,” Krausz said. “But some of our best investments have come out of these periods of extreme stress in the markets,”
Watch the full recording of this episode HERE.