June 30, 2020
[Sadiki Wiltshire is an SEO Law Fellow at Lowenstein Sandler LLP, a rising 1L at Stanford Law, and a graduate of Princeton University (China Studies / Physics). See disclosure end note.]
On June 10th, Acrew Capital Founding Partner, Theresia Gouw, and Northzone General Partner, Pär-Jörgen Pärson, discussed with Lowenstein Sandler LLP Partner and Tech Group Chair, Ed Zimmerman strategies for building a venture firm, raising a new fund, and investing during the time of COVID. Northzone hosted the event for dozens of early stage venture capital investors around the globe. Gouw, Parson, and Zimmerman each entered this sector in the 1990s and have participated through numerous economic cycles. Gouw and Parson are regulars on the Forbes Midas List of the World’s most successful Venture Investors. Gouw is based in the Bay Area, Parson in Stockholm, Sweden, and Zimmerman (who has served as a Professor of Venture Capital in Columbia University’s MBA Program for 15 years and co-founded and chairs VentureCrush), is based in New York.
Here are three takeaways.
1. The next 6 months. The next 6 months are likely to have a dim economic outlook on a macro level, as we see the ripple effect of U.S. unemployment exceeding 30M (see Fortune, June 9, 2020). There will be bright spots in the market, but it will be a more varied market.
Macro Outlook. 2020 will be a tale of quarters. This contrasts the economic downturn in 2001/2002, when the pace of new investments froze. Parson, Gouw and Zimmerman expressed the view that venture investment activity would continue, though they anticipated a prolonged recovery.
When will deal pacing return to normal? Gouw seems to think that by late Q3, “we’ll kind of go back to a more normalized deal pace.” She observed that Q1 offered pretty normal deal cycles. But with respect to shorter term, week-to-week, and month-to-month corrections, Gouw believes that the countdown to normalcy will vary as investors “will see differences in actual investment sizes according to stage type. But most VCs now are actually actively meeting with people and writing checks.” Will the pace be the same as the near-record levels in 2019? Gouw thinks not. “2019 was a pretty high deal pace, but  won’t look unwieldy. [However,] I don’t think it’s going to look like 2000 where most firms, that I remember, basically did nothing.”
Opportunity. There are numerous cases of billion-dollar companies being spun out in periods of economic uncertainty.
Enter Trulia. Gouw invested in Trulia in 2004. This was shortly after the dot-com bubble burst, but well before the company began to hit a growth phase in 2008, when the financial crisis hit. In fact, Trulia closed a Series D funding round in July 2008, only a month or two before the Bear Stearns collapse. Throughout the downturn, Trulia rode a growth curve that ended in the company raising over $255M in total funding, a successful IPO and later being acquired by Zillow for $3.5B in 2014. By soldiering through the downturn to eventually close a multibillion-dollar sale, Trulia provides an example of “[being] smart about how you use your capital” and using economic downturns as an engine for growth.
2. Investing in a COVID world. Early stage investing amidst COVID has become the accepted state of play. Despite having initially thought that shutdowns would be temporary, we’re now resigned to understanding that for a protracted period, we’ll operate in a COVID environment. This is, in some ways, liberating, as people can now make decisions and move forward with business strategies, rather than waiting for a temporary setback to fade.
Counseling Founders to Seize the Opportunity – Pärson believes that it is the investor’s job to (1) remind founders that while COVID is a pernicious problem, there are presently “tremendous opportunities,” and (2) ensure that founders seize those opportunities before they disappear. For Pärson, investors must “look beyond temporary effects.” To drive home this point, Pärson offered the example of one of his portfolio companies, Hopin, an online course conferencing platform that has been experiencing an incredible usage surge during COVID. In cutting through the distractions of short-term interest uptick to best drive long-term growth Pärson recounts, “obviously, [Hopin has recently] had a tremendous inflow of customer and investor interest.” However, at that point, Hopin “really needed to manage inflow to keep service quality acceptable for existing customers. To do so, Hopin put thousands of eager new customer prospects on waiting lists to serve them once Hopin could guarantee high service quality. They just had to make sure to build the company for the long haul and not get carried away by this extraordinary” but unanticipated surge. Pärson clarified that though COVID may yield short-term demand inflation, companies able to remain level-headed and build their post-COVID growth plans, will likely yield the most benefits.
Look at Demand Surges, but Double Down on Great Teams.
How do you best determine when to invest during COVID?
Gouw spoke about startups that had struggled with low demand volumes pre-COVID but have experienced demand surges during COVID. She offered insights into distinguishing between promising investments and short-term unsustainable demand increases. Gouw sees indicators pointing toward increasing her investment in company that had not yet his their stride primarily due to lack of “market demand, but you always felt that the management team was strong and doing the right things operationally, and if you believe that the demand being driven now is lasting.” Shifting market conditions can provide a structurally sound team the opportunity to emerge with a strong company.
To illustrate this point, Gouw discussed her recent reinvestment in a healthcare SaaS portfolio company experiencing an uptick in telemedicine scheduling during COVID. In deciding whether to reinvest, Gouw evaluated a set of factors including: the team’s ability to sustain its growth trajectory post-COVID, the business impact of the decrease in in-person scheduled visits, and probabilities of different post-COVID in-person/telemedicine scheduling distributions. Ultimately, however, for Gouw, the decision boiled down to the team: “I think the other investors around the table invested mostly because of how strongly we all felt about the team.”
3. Building resilience via Diversity, Equity and Inclusion. All conversations happen in the context of the defining issues of the day. Just as COVID was a major factor contextualizing the discussion, so, too, were the murders of George Floyd and Breonna Taylor, as well as the ensuing, ongoing nationwide reevaluation of systemic racism in the U.S. During the present period of turbulence, an increasing number of venture firms and startup/growth company management teams view effective diversity, equity, and inclusion as both an indicator of a team’s resilience and a positive signal for the future of that enterprise (as contrasted with less diverse organizations). This will inform some, but not all, go forward investment strategies. Parson, Gouw and Zimmerman felt strongly that diversity, equity and inclusion are important priorities for the go forward, though each has a history of being outspoken in favor of prioritizing these issues. See, e.g., Zimmerman’s October 7, 2013 column on the Accelerators page of the Wall Street Journal urging greater diversity efforts in venture and tech, noting “ 52% of VCs had degrees from a small cluster of 10 schools (hardly worth naming which ones, right?) and a staggering 87% were Caucasian.”
This is the first of a series of Tech Group Debrief posts that will provide insight into how you and your team can navigate early-stage investing, financing, and legal challenges. Click here for Tech Group debrief updates. Remain on the lookout for our next post, coming to your inbox soon.
Disclosure: Ed Zimmerman is personally an investor in and his law firm, Lowenstein Sandler LLP, is counsel to funds managed by Northzone and by Acrew.