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Venture capital and coronavirus

“Be fearful when people are greedy, and be greedy when people are fearful,” is one of my favorite Warren Buffett quotes. It’s from late in his career as a super-investor. I like to think he’s sharing the wisdom of decades of investing across many different capital market cycles, and it applies to venture capital. I want to make sure Valor does a great job of communicating during crises, and so here’s some of our thought around the current coronavirus pandemic and its effects. To summarize what we can observe from the boom and bust cycle in venture capital —

  • Capital raising slows
  • Acquisition volume slows
  • Less capital-efficient companies die
  • Great companies are born

For Valor and our thesis around inclusion driving highly acquirable companies,  this means more signal–less noise. That’s a good thing. 

Seed-stage VC is in a great position to have big winners in our new recessionary reality. 

More talent on the market

Many major global firms are cutting back and moving into operational modes. Last month, there may have been dozens, if not hundreds, of developers working on potential new projects. Now, many of those talented individuals are available. Today, unlike every other time in history with a downturn, we have the ability to access large pools of talent remotely. LinkedIn, Upwork, Zoom, Fivrr, and so many more companies provide an infrastructure the world has never had before.

With a high-speed global satellite communications backbone coming over the next couple years thanks to SpaceX and others, the long term horizon is access to top talent will reach every corner of the world—not just the developed world. 

Tech, talent, and hungry new customers are the three critical catalysts to creating an incredible startup. There’s cheaper tech, more talent, and insane amounts of hunger now for new solutions. They are in abundant supply through Valor’s Fund 2 investing period.

At the start of 2020, it was cheaper than ever to start a firm—now it’s even cheaper. 

With the economy tightening its belt and an end to the 128-month boom cycle we’ve been experiencing, more than talent is going to experience price reductions. This is a huge boon to the startup. It used to be relatively inexpensive to start a software business—and now it’s going to be even less expensive. Less travel–and more people online–means less cost of customer acquisition.

Investors, especially at seed-stage, stand to profit from the opportunity to work with scrappy entrepreneurs who (now) have greater access to top talent. 

In a recession environment, it appears riskier financially to start a firm. Vanity metrics suddenly stand out starkly as what they are. Founders who achieve customers own exceptional levels of grit and financial discipline. They learn the customer earlier. They learn financial controls earlier. 

While growth stage venture capital is going to become insanely competitive, as firms compete to keep their existing portfolios alive and fight over too few deals left from recession attrition, the hidden opportunity for private investors lies in seed. Seed venture capital is currently around 6% of deployable venture capital funding.  In other words, it’s scarce. This is where the ball has shifted. It’s where the silver linings are already starting to glimmer.

Dense and exclusive venture capital environments profited from “network effects” before coronavirus. These approaches may now be counter-cyclical. 

New York and San Francisco, among the first cities that shut down,  will have some of the severest measures in place in our coronavirus driven near reality. The strengths of these markets are lessened by the new realities, especially for entrepreneurs who have little to no incentive to build in the most expensive and most restrictive cities. San Francisco and New York were among the first cities to be on full lockdown. A venture capital culture of endless face to face events—is closed. It was already under pressure from movements around inclusion. Only time will tell if that heyday is past us, but all early signs say it is. Will classic venture capital environments like SFO and NYC ever return to such a pulse, once the habit is broken and sharp founders and VCs learn to raise capital on Zoom?

Vanity startups are so pre-coronavirus

Much of the access to capital has been determined by access to privileged professionals who pursued venture capital after an undergraduate stint at Stanford, Harvard or other Ivies. Long term data shows that women and people of color are starting businesses at faster rates than white male founders—the population that has historically received 95% of venture capital investment and has also had the most access (proximity) to it.  Compelling research over 10 years and 20,000 startups from MAC Capital and Kauffman Foundation shows that underrepresented founders return 30% more capital, on average, to their investors.

70% of Valor’s portfolio is led by underrepresented founders. In a recessionary market with greater digital access, the opportunity for underrepresented founders to earn big returns for their backers is pressurized. 

Valor’s experience is proving this out. 

We launched a standing virtual pitch fest to open the doors to founders in our region who are post-revenue and post product, and we’re seeing more quality than ever. 

In closing, coronavirus is catalyzing a rewarding time to be a seed-stage venture capital investor.

I’m humbled by and grateful for our mandate to back visionary founders with financial inclusion platforms during this historic opportunity. Valor is bullish about this market. There are thousands of lights of opportunity lit in this crisis, and our platform is tuned to find them.

Let us know what you think, and please reach out with comments and follow up thoughts.

  • NEXT UP: If you’d like to hear Valor discussing these themes, please tune in to our latest podcast, where we talk about venture capital and coronavirus with a pension fund and a family office.